Sterling remains the Forex favorite due to the rapid economic recovery and the intentions of the Bank of England to raise the interest rate in 2022. However, one cannot say that the GBPUSD bulls have no vulnerabilities. Let us discuss them and make up a trading plan
Weekly pound fundamental forecast
Unlike most of the major world currencies, which do not want to compete with the US dollar after the release of impressive US employment data, the pound has managed to maintain its position. When monetary policy and economic growth become the main drivers of Forex exchange rate formation, sterling has something to respond to its competitors. The BoE officials are about QE tapering and raising rates more and more, while GDP figures are more pleasing than upsetting.
In the second quarter, economic growth in the UK was higher than in other major developed countries. GDP expanded by 4.8%, in line with the Bloomberg consensus estimate, although slightly below the BoE forecast of 5%. By the end of June, the size of the UK economy was only 2.2% less than in February 2020. According to Capital Economics, by October it will return to its pre-pandemic level.
Dynamics of the economic recovery in the UK
Source: Financial Times.
GDP dynamics of developed countries
Source: Bloomberg.
The expansion of GDP depends on successful vaccination. In the UK, 70.5% of adults received at least one dose of COVID-19 vaccine, which is higher than in the US (58.8%) and the EU (61%), although slightly lower than in Canada (72.5%) and Spain (71.3%). It should also be noted that the number of COVID cases in the UK is decreasing, while in the US, on the contrary, it is growing.
The success of vaccination and the economic recovery allows the BoE officials to talk about the monetary policy normalization. The derivatives market is set to increase the interest rate to 0.25% by August 2022. The indicator is likely to reach its 0.5% threshold by the end of 2023-the beginning of 2024, after which BoE will stop reinvesting bond income. According to Bloomberg calculations, by 2030 the central bank could withdraw about £400 billion from the markets, significantly reducing BoE’s accumulated assets as a result of the implementation of £895 billion QE.
Dynamics of BoE bond retirement
Source: Bloomberg.
Thus, from the point of view of economic growth and monetary policy, the sterling’s position looks strong, but it cannot be said that it has no vulnerabilities. The Irish border issue remains unresolved. London and Brussels have declared a truce, but there is still a long way to go before a final solution to the problem. Doves dominate the Bank of England MPC structure, which suggests that the rate of monetary policy normalization will be slower than that of the Fed.
In the short term, the correction of US stock indices serves as the main risk for the GBPUSD bulls, which is likely to affect all financial markets, including the UK stock market. The pound is very sensitive to changes in global risk appetite as the UK needs to raise capital to fund the current account deficit.
Weekly GBPUSD trading plan
In my opinion, the S&P 500 consolidation will allow the GBPUSD to consolidate in the 1.375-1.4 trading range over the next 2-3 weeks. It makes sense for traders to use rebound strategies from the beforementioned range’s border zones and focus on narrow targets.
Price chart of GBPUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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