Markets do not expect the Bank of England to sharply reduce the repo rate in March and have lowered the odds of two rounds of monetary expansion in 2026. It would seem that the GBP/USD pair should have increased. However, the pair is declining. Why? Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The chances of a repo rate cut are decreasing.
- Geopolitical factors have made the pound vulnerable.
- The Labour Party’s ratings are falling rapidly.
- Short positions on the GBP/USD pair can be opened on a rebound from the resistance level of 1.339.
Weekly Fundamental Forecast for Pound Sterling
Currency fluctuations against the backdrop of the conflict in the Middle East are determined not by the speed and timing of changes in central bank rates, but by trading conditions. That is why lower expectations for the scale of monetary expansion did not save the GBP/USD pair from collapse.
According to Bloomberg, soaring oil and gas prices due to the US and Israeli attack on Iran will add 0.4 percentage points to UK inflation. This means that consumer prices will rise not by 2%, as expected by the Bank of England, but by 2.4%. Since there are roughly equal numbers of hawks and doves on the Monetary Policy Committee, the acceleration in CPI is a strong argument for a pause in the cycle of monetary policy easing.
Forecast for UK Inflation
Source: Bloomberg.
Indeed, prior to the armed conflict in the Middle East, the futures market was confident in two rate cuts by the end of 2026. Today, the derivatives market gives only a 25% probability of such an outcome. The chances of a repo rate cut at the end of March have fallen from 80% to 30%.
Market Expectations for BoE Interest Rate
Source: Bloomberg.
If it weren’t for the geopolitical situation, such forecasts would definitely support the pound. The longer the Bank of England keeps borrowing costs high, the more attractive UK assets look. However, the turmoil in the Middle East is changing everything. Reuters has revised its forecast for UK GDP growth in 2026 down from 1.4% to 1.1%, painting a stagflationary scenario for the UK economy. Against this backdrop, the GBP/USD pair is facing more pressure.
The fact that the UK is a net importer of oil and natural gas and that a new energy crisis may hit Europe is causing investors to get rid of the pound sterling. Moreover, the country’s political situation remains unstable. Not only did the Labour Party lose the Manchester by-election, but Prime Minister Keir Starmer’s position is also shaky. The ratings of rival parties are growing rapidly, as is the money invested in them.
Nigel Farage’s populist party raised £5.5 million in donations in the fourth quarter, the Conservatives raised £2.3 million, and Labour raised £1.7 million. Local elections will be held in the UK in May, with general elections scheduled to take place before 2029. The current government’s low approval ratings and the threat of the prime minister’s resignation are putting pressure on the pound.
Weekly Trading Plan for GBP/USD
As a result, worsening trading conditions due to the armed conflict in the Middle East, political turmoil, and looming stagflation are preventing GBP/USD bulls from gaining traction. The pair has reached its short-term targets of 1.342 and 1.339. If it fails to break through 1.339, short positions can be considered.
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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