While Fed officials unanimously agree on the need for a pause in the monetary expansion cycle, the Bank of England officials are split on the issue. The repo rate may fall as early as March. However, this is not the only trouble for the GBP/USD pair. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The market expects a repo rate cut in March.
- New US tariffs will slow UK GDP.
- The Labour Party’s defeat in the elections is bad news for the pound.
- Short trades on the GBP/USD pair can be opened with the targets of 1.342 and 1.339.
Weekly Fundamental Forecast for Pound Sterling
The growth of US stock indices came to the aid of the GBP/USD pair. However, the divergence in monetary policy between the Fed and the Bank of England, Donald Trump’s introduction of new tariffs, and the shaken confidence in the Labour Party suggest that the pound is more likely to fall against the US dollar than to rise.
While there is remarkable unanimity within the Fed, the uncertain outlook for the British economy is causing a rift in the BoE’s Monetary Policy Committee. Votes are increasingly close, with decisions being made by five votes to four. Andrew Bailey plays a decisive role. According to him, the question of lowering the repo rate in March remains on the agenda.
UK Unemployment Rate
Source: Bloomberg.
BoE chief economist Huw Pill is skeptical that inflation will stabilize at 2% if monetary policy is further loosened. Notably, he belongs to the hawk camp. On the contrary, Alan Taylor, a dove, believes that the repo rate could fall below 3% if the UK faces a recession. The first sign of an impending downturn is a surge in unemployment to a five-year high.
Thus, there is a split within the MPC, but the futures market continues to believe in the continuation of the monetary expansion cycle as early as March. In contrast, hawkish rhetoric from FOMC officials has shifted the expected timing of the resumption of the federal funds rate reduction cycle from June to July. This factor supports GBP/USD bears.
The UK may find itself on the losing side due to the Supreme Court’s cancellation of Donald Trump’s tariffs and the introduction of new import duties. So far, the tariff rate is 10%, but the US administration does not rule out raising it to 15% for some countries. Given existing tariffs, the new ones may exceed the 10% tariff previously agreed upon by London and Brussels. It will deal a severe blow to the already crippling UK economy.
UK GDP Growth
Source: Bloomberg.
Finally, the third threat to the pound comes from the political arena. Keir Starmer is currently one of the most unpopular prime ministers in history. The Polymarket prediction market estimates the odds of him resigning before the end of the year at 63%, and Labour’s defeat in local elections could be the final straw.
Thus, the divergence between the Fed and Bank of England interest rate trajectories, higher US tariffs, and political turmoil may drag the pound down against major global currencies.
Weekly Trading Plan for GBP/USD
Against this backdrop, selling the GBP/USD pair on upward movements is a viable strategy. The current pullback in the pair provides an excellent opportunity to open short positions with the previous target levels of 1.342 and 1.339.
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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