Where could the GBP/USD find a bottom? Can the pound recover after the massive sell-off, or will political and energy-sector pressures reminiscent of the 2022 crisis drive the pair to new lows? Let’s examine the key factors shaping the outlook and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- PMI points to a slowdown in GDP.
- The likelihood of a Bank of England rate hike is lower than the Fed’s.
- Political and energy-related issues are putting pressure on the pound.
- Short trades on the GBP/USD pair can be opened with targets of 1.3150 and 1.3025.
Weekly Fundamental Forecast for Pound Sterling
The UK economy is losing momentum, the Bank of England is lagging behind the Fed in the pace of monetary policy, an energy crisis is looming, and political risks are resurfacing. What more could weigh on the GBP/USD pair? The pound has fallen to its lowest level since early July, hitting the first bearish target of 1.3300, with 1.3140 in sight. Can the pound sterling find solid ground, or will the decline continue?
A strong economy tends to support a strong currency. From this perspective, the sharp decline in the GBP/USD amid strong US PMI in September to its highest level since 2021 is understandable. By contrast, UK purchasing managers’ indices disappointed, falling to a three-month low. The data prompted S&P Global to forecast a slowdown in UK GDP growth from 0.4% in the second quarter to just 0.1% in the third quarter.
US PMIs
Source: Bloomberg.
Had the UK economy continued along the trajectory seen in the first half of the year, the Bank of England would have had greater reason to expect inflation to accelerate and to move toward tighter monetary policy. In September, the Monetary Policy Committee kept the repo rate at 3.75%, with the decision passing by a six-to-three vote. Andrew Bailey noted that higher energy prices had not yet fed through into core inflation. However, he warned that a further escalation of the conflict in the Middle East could change that dynamic, potentially forcing the BoE to begin a new cycle of monetary tightening.
At the time, Brent crude was trading near $110 per barrel; it has since fallen below $100. Combined with a slowdown in the PMI, this has prompted derivatives markets to lower the implied probability of a November repo-rate hike to 60%. With the probability of a federal funds rate hike at the next FOMC meeting rising from 54% to 70%, the recent decline in the GBP/USD appears consistent with the shifting interest-rate outlook.
BoE Benchmark Rate
Source: Bloomberg.
Investors may be pricing in four rounds of Bank of England monetary tightening over the next 12 months, compared with three expected from the Fed. In reality, the numbers could look quite different. The BoE faces several constraints that could temper MPC hawks’ enthusiasm, particularly developments in the energy sector and the political landscape.
Donald Trump’s decision to restrict diesel fuel exports triggered an immediate 7% jump in prices, while diesel prices have risen 135% since the beginning of the year. Europe is likely to bear much of the impact. The prospect of an energy crisis, coupled with memories of the turmoil surrounding Liz Truss’s resignation as prime minister in 2022, is weighing on the pound sterling. Four years ago, the pound plunged to a record low against the US dollar. The presentation of the draft budget by Andy Burnham’s government could revive concerns about a repeat of that episode.
Weekly Trading Plan for GBP/USD
Against this backdrop, short positions in the GBP/USD, based on the Bank of England’s apparent reluctance to raise interest rates in September, appear justified. With the pair having reached the first of the two previously identified targets at 1.3300 and 1.3150, traders can use upswings as opportunities to add to short positions. At the same time, it makes sense to move bearish targets lower to 1.3150 and 1.3025.
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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