Currencies move in cycles. The black stripe is followed by the white one, and vice versa. The bad times for GBPUSD ended in 2022. In 2023, the pound is the leader. For how long? Let us discuss the Forex outlook and make up a trading plan.
Weekly Pound fundamental forecast
You must look into one’s past to get to know someone better. The same is true for a currency. While the pound continues to be G10 best performer, its success results from a low valuation. In the autumn of 2022, the GBPUSD hit a historical low due to the unsuccessful attempt by Liz Truss to stimulate the UK economy amid the BoE monetary tightening. Jeremy Hunt’s classic approach to financial management has reassured investors. There was a rebound upwards, which allowed the sterling to grow in price.
The underestimation of the economy also supported the GBPUSD bulls. If, in 2022, the Bank of England predicted a protracted recession, then in 2023, it became clear that the downturn could be averted. Furthermore, the UK inflation is the highest in the G7 countries and the derivatives market bets that the BoE rate will increase to 6%. The pound’s rally looked natural. However, a weak PMI report lowered the expected interest rate ceiling to 5.85% and dropped the value of sterling.
Dynamics of UK PMI
Source: Financial Times.
According to Capital Economics, the BoE will soon begin to slow down the process of monetary restriction, and the UK economy will slide down into a mild recession. Nomura notes that Purchasing Managers’ Indexes were at current levels in October 2022, when energy prices were really high, and predicts the GBPUSD to go down to 1.22.
According to Bloomberg, the UK economy is heading towards a long period of stagflation, expressed in little or no GDP growth. In this case, inflation will be at elevated levels. In such conditions, the Bank of England will sooner or later move away from its hawkish stance, pressing down the pound. Only the weakness of the US dollar can support the sterling bulls. So far, however, the greenback has given no reason to doubt itself.
The growth of US stock indices amid Nvidia’s impressive financial results and the fall in US Treasury yields due to disappointing US PMI data somehow supported the GBPUSD. The pair has rebounded from the previously indicated convergence zone 1.2615-1.263 for the third time, which indicates the presence of a strong buyer.
The further GBPUSD trend depends on Jerome Powell’s speech in Jackson Hole. The Fed Chair is expected to give some clues about the future of the federal funds rate. Will it continue to rise or remain on a plateau? In fact, it is too early for the Fed to move away from its hawkish stance as it poses a risk of undermining the central bank’s efforts to reduce inflation. Therefore, Powell will hardly voice the Fed’s plans.
Weekly GBPUSD trading plan
I suppose the expectations for the US economic performance are too high, just as well as they were too low for the UK economy in the past. Under such conditions, the greenback can weaken if the US economy fails to meet the forecasts. If the GBPUSD goes to the lower border of the trading range of 1.2615-1.28 or breaks out its upper border, it will be relevant to buy.
Price chart of GBPUSD in real time mode
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