Markets believe that the Bank of England will maintain its current monetary policy. However, the rift within the UK regulator could lead to other outcomes. In addition, Britain’s budgetary hurdles are likely to exert pressure on the pound. Let’s discuss this topic and make a trading plan for the GBPUSD pair.
The article covers the following subjects:
Major Takeaways
- Markets are not expecting a reduction in the repo rate.
- The Bank of England’s hawks prevail.
- Political factors may weaken the British pound.
- Long positions on the GBPUSD pair can be opened on a breakout of 1.344.
Weekly Fundamental Forecast for Pound Sterling
Markets expect the Fed to cut the federal funds rate by 50 basis points and are beginning to price in the possibility of a larger cut. Meanwhile, the Bank of England is projected to keep the rate unchanged. However, where exactly GBPUSD will go will depend on the actual actions of regulators. At the same time, traders need to keep in mind political factors. The budget drama is likely to move from France to the UK.
After lowering the repo rate in August, the Bank of England took a pause. The derivatives market suggests that this pause will last until March. Even after disappointing UK labor market statistics, the market raised its estimates for monetary expansion in 2025 from 5 bps to 9 bps. These estimates remain modest, which supports the GBPUSD pair.
UK Inflation Change
Source: Bloomberg.
The latest Bank of England meetings are turning into real battles. Sometimes, two votes are needed to decide on the repo rate trajectory. The divided MPC reflects the different views of officials. While Megan Green is concerned about high inflation, Alan Taylor believes that without easing monetary policy, it will be impossible to achieve a soft landing for the economy.
At the same time, the shift in the balance of speeches by supporters and opponents of monetary expansion towards the hawkish signals a strengthening of the pound. The question is, at what levels will the Bank of England and the Fed end their cycles in 2025?
BOE Hawkish and Dovish Sentiment Index
Source: Bloomberg.
The division within the Bank of England is beginning to affect the market. While Jefferies believes that the futures market is underestimating both the likelihood of the Bank of England easing monetary policy in 2025 and the extent of monetary expansion, Credit Agricole believes that the regulator will adhere to its current course. The pound sterling is likely to exhibit a temporary weakness in the event of a disappointing employment report, but this impact is expected to be short-lived. Following a decline below 1.33, the GBPUSD pair recovered quickly.
However, risk reversals indicate a high probability of a fall in the pound in November, due to Rachel Reeves’ presentation of the draft budget. The Chancellor needs to address the budgetary issues, and investors are concerned about a potential recurrence of the 2010 financial crisis. In the fall of 2022, a flawed financial plan led to the resignation of Liz Truss’s government, pushing the GBPUSD rate lower.
It is unlikely that history will repeat itself. At that time, there was a mismatch between monetary tightening and fiscal stimulus. In light of the prevailing high interest rates, the United Kingdom is considering a tax increase.
Weekly GBPUSD Trading Plan
However, just as French policy has hindered the euro, a similar dynamic is likely to occur with the pound, as British policy will likely impede its growth. According to the forecast, the GBPUSD pair has consolidated in the range of 1.33–1.36. Long trades could be opened after the pair’s return above 1.33. If the price breaks through the resistance level of 1.344, long positions can be increased.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of GBPUSD in real time mode
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