As in 2022, the UK may face an energy crisis triggered by armed conflict. The key question is whether the Bank of England will exercise the same caution it did back then, and whether it has learned from past policy missteps. Let’s discuss this topic and make a trading plan for the GBP/USD pair.
The article covers the following subjects:
Major Takeaways
- Markets do not expect the Bank of England to cut the repo rate.
- UK inflation may jump to 5%
- Europe may avoid a new energy crisis.
- Short trades on the GBP/USD pair can be opened on a breakout of 1.336.
Weekly Fundamental Forecast for Pound Sterling
In economic theory, energy market shocks are generally considered temporary by central banks. This was the Bank of England’s approach in 2022. However, as inflation surged to its highest levels in decades, the BoE was forced to raise rates aggressively. The Middle East conflict appears to be recreating similar pressures. The question now is whether the BoE should adjust its policy to prevent a repeat of the sharp decline in GBP/USD quotes experienced four years ago.
Before the confrontation between the US, Israel, and Iran, the futures market was confident that the repo rate would be lowered at the Monetary Policy Committee’s meeting in March. However, this scenario is now ruled out, and a reduction in borrowing costs at any other meeting has a coin-flip chance of materializing. The main reason is the risk of accelerating inflation. ING expects consumer prices to rise to 4.7% by September, while RSM UK forecasts a range of 4.5–5%.
UK Inflation Expectations
Source: Bloomberg.
Investors are beginning to realize that events in the Middle East are unlikely to follow the scenario of summer 2025, with its 12-day war between the US, Israel, and Iran. Most likely, the conflict will drag on, no matter how much Donald Trump talks about its imminent end. This gives rise to a feeling of déjà vu. Since February 2022, following the onset of the Russia-Ukraine conflict, GBP/USD quotes dropped in six of the subsequent eight months. In September, they reached a historic low below 1.04, when the resignation of Liz Truss’s government added to the geopolitical and energy crisis.
Today, Keir Starmer’s chair is also wobbling. According to Bank of America, investors are underestimating the risks of Labour’s defeat in the local elections in May. On the other hand, gas prices in Europe are several times lower than in 2022. The ECB and the European Union believe that a new energy crisis can be avoided.
UK Gas Prices
Source: Bloomberg.
As a result, there will likely be a repeat of what happened four years ago. The Bank of England will prefer to remain cautious and then may start raising rates. Keir Starmer risks resigning as Prime Minister, and the UK will cope with high energy prices. At the same time, the GBP/USD pair will unlikely fall as sharply as in 2022.
Indeed, if the conflict in the Middle East ends quickly, as Donald Trump says, the pound will begin to recover its losses, including those incurred against the US dollar. In this case, the pace of oil price decline will play a crucial role.
Weekly Trading Plan for GBP/USD
It appears that a peaceful resolution between the US, Israel, and Iran remains a distant prospect. The GBP/USD pair is likely to continue trading in the downward trend. A breakout of the support level of 1.336 will create an opportunity to open short positions on the pound against the US dollar. The targets are 1.307 and 1.29.
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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