Pound found outsider. Forecast as of 16.11.2023

2023.11.16 2023.11.16
Pound found outsider. Forecast as of 16.11.2023

Dmitri Demidenkohttps://www.litefinance.org/blog/authors/dmitri-demidenko/

Will the Bank of England cut interest rates in 2024? Will the ECB or Fed start monetary easing earlier? The GBPUSD trend depends on the answers to these questions. Let us discuss the Forex outlook and make up a trading plan.

Monthly Pound fundamental forecast

Just as two years ago, investors were speculating which central bank would raise rates faster and higher, now they are trying to identify which one will lower them faster and lower. In Forex, instead of chasing the favorite, the game of “find the outsider” begins. So far, the derivatives market is forecasting the first easing of monetary policy in June, after which the Bank of England will cut the Bank rate by 75 basis points until the end of next year. Not everyone agrees with this, and the GBPUSD trend depends on exactly how events develop.

After UK inflation slowed from 6.7% to 4.6% in October, investors have been speculating when exactly the BoE’s dovish shift will occur. Morgan Stanley believes that the UK economic growth will contract in the fourth quarter, and inflation will fall to the 2% target faster than expected. As a result, Andrew Bailey and fellow central bankers will begin to lower borrowing costs in May and cut the Bank rate from 5.25% to 4.25% by the end of 2024.

Dynamics of UK inflation

Source: Financial Times.

On the contrary, Oxford Economics believes the ECB will start monetary easing earlier than the BoE. They say that the euro-area economy suffered more from the war in Ukraine than the UK. It is more sensitive to tightening monetary policy. Inflation in the currency bloc is falling faster, as in the UK, it is fueled by rapid growth in wages, including due to the labor shortage after Brexit. As a result, the European CPI will reach the 2% target sooner than its US or UK peers. This will force the ECB to cut rates faster than the Fed or Bank of England.

Dynamics of inflation

Source: Financial Times.

I prefer the position of Oxford Economics. Most likely, BoE will not rush, which makes sterling the favorite. Both the pound and the euro are pro-cyclical currencies. Their rates depend on the state of the world economy. For a long time, it was hampered by high inflation and the associated monetary tightening of the Fed and other central banks. If prices return to pre-pandemic levels and regulators turn dovish one by one, global GDP will show a better performance than expected. Therefore, the GBPUSD will rise.

Sterling will also be supported by a rising global risk appetite. Having a significant current account deficit, the UK  is forced to cover it through the inflow of foreign investment. This process goes faster if demand for UK risky assets increases. In this regard, the rapid rally in US stock indices is great news for GBPUSD bulls.

Monthly GBPUSD trading plan

Thus, the slower monetary expansion of the Bank of England compared to the Fed, the improvement in the global economy and global risk appetite increase the chances that the GBPUSD trend will turn up. The longs entered at 1.22 and 1.2305 turned yielded profits. Therefore, I suggest buying on corrections. The initial targets are 1.26 and 1.29.

Price chart of GBPUSD in real time mode