The weakness of the British economy and the reluctance of inflation to pick up allow the Bank of England to feel comfortable with current interest rates. The divergence in monetary policy with the Fed is supporting the GBP/USD bears. Let’s analyze the situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The Bank of England will keep its repo rate at 3.75%.
- The likelihood of the BoE tightening monetary policy is declining.
- Political risks are weighing on the pound.
- Pullbacks in GBP/USD may provide an opportunity to add to short positions initiated at 1.3450.
Weekly Fundamental Forecast for Pound Sterling
What once seemed like a life-changing event may, in fact, turn out to be just another ordinary day. The Bank of England meeting and the Makerfield by-election were supposed to become a “Super Thursday” for the pound. However, the clarification of the outlook for British inflation and the virtually settled issue of the leading candidate for prime minister securing a seat in Parliament have diminished the significance of these events.
According to Bloomberg, the Bank of England will keep the repo rate at 3.75% by a vote of seven to two. The futures market continues to price in a 25-basis-point tightening of monetary policy in 2026, but investors are gradually leaning toward the view that borrowing costs will remain at their current level through the end of the year.
Market Expectations for the Bank of England’s REPO Rate
Source: Bloomberg.
The main reason is the confidence that the acceleration in inflation is temporary. Consumer prices in the UK rose by 2.8% in May, falling short of forecasts. They are lower than in the US, even though the country is heavily dependent on energy imports. Moreover, with Brent crude falling below $80 per barrel amid the end of the conflict in the Middle East, Bloomberg forecasts CPI growth of no more than 3% in 2026. This is lower than the Bank of England’s most optimistic estimate of 3.6%. The pessimistic scenario assumes inflation will surge to 6% amid the most severe oil crisis in history.
Oil Price and Market Expectations for BoE Interest Rate
Source: Bloomberg.
If we add to this the signs of a cooling UK economy, the question of tightening monetary policy is off the table. Indeed, after expanding by 0.6% in the first quarter, GDP contracted by 0.1% in April, notching the first decline since August. Unemployment has fallen slightly but remains at historically high levels.
The political risks surrounding the pound have not gone away. Josh Simons, the incumbent Member of Parliament for Makerfield, has resigned. According to him, this move will pave the way for Andy Burnham to become leader of the Labour Party and prime minister. Investors are selling bonds and the GBP/USD pair amid fears that the new head of government will push for fiscal stimulus.
Thus, the divergence in monetary policy between the Bank of England and the Fed, as well as high political risks due to a potential change in the British government, are pushing the pound lower against the US dollar. Even hawkish rhetoric from the BoE is unlikely to remedy the situation. The only thing that could save the pound is a decline in the probability of the Fed tightening monetary policy.
Weekly Trading Plan for GBP/USD
Against this backdrop, short positions opened at 1.345 on the GBP/USD pair appear to be a sound strategy. As long as the pair trades below 1.328, upswings should be used to build up short positions.
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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