Pound is cornered. Forecast as of 23.03.2023

2023.03.23 2023.03.23
Pound is cornered. Forecast as of 23.03.2023

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

Earlier the Bank of England lagged behind the Fed, which raised rates more aggressively, now the situation has changed. UK inflation unexpectedly accelerates, which makes the BoE a pronounced hawk and contributes to the GBPUSD rally. Let’s discuss the Forex outlook and make up a trading plan.

Quarterly fundamental pound forecast

There is always a choice. However, the first acceleration of UK inflation in four months has driven the Bank of England into a corner. If, amid the banking crisis, investors expected the end of the monetary tightening cycle, and as the situation stabilized, derivatives gave a 50% chance of raising the interest rate by 25 basis points in March, now the situation has become more than transparent. Andrew Bailey and his colleagues have to bring the bank rate to 4.25% and possibly continue monetary tightening, supporting the GBPUSD growth.

Acceleration of UK consumer prices to 10.4% with forecasts of their slowdown to 9.9% was a shock for the MPC centrists. The hawks are now in favour, insisting on continuing the most aggressive monetary tightening in three decades. Core inflation accelerated to 6.2%, which is 0.7 percentage points higher than in the US.

Dynamics of UK inflation

Source: Bloomberg.

The difference suggests divergence in the monetary policy of the Bank of England and the Fed and contributes to the GBPUSD rally. The derivatives market fluctuates between raising the federal funds rate by 25 basis points to a peak of 5.25% or keeping it at 5%. The forecast for the BoE interest rate is different. Investors see its ceiling at 4.75%, which implies three more rate hikes.

Only 11 out of 42 Bloomberg experts predict that the BoE will not change interesting rates in March. At the same time, the consensus estimate is that 6 MPC members will vote for a 25-basis-point rate, while the rest will not.

Divergence in monetary policy is a powerful driver of the GBPUSD rally, but it is unlikely that the bulls could drive the price above 1.23 if it were not for the weakening of the US dollar across the entire spectrum of the market. The persistence of FOMC forecasts weakened. Moreover, because of the banking crisis, hedge funds made an extremely unsuccessful bet on it. In the week by March 14, they began to buy the US currency after 13-week sales. Safe-haven status was supposed to help the dollar, however, due to a sharp drop in Treasury yields, these forecasts did not come true. As a result, prematurely formed greenback longs had to be exited, which had a positive effect on the GBPUSD.

Dynamics of USD and US dollar speculative positions

Source: Bloomberg.

In conditions of high inflation and problems in the banking system, the tasks of central banks become much more difficult. The Bank of England – doubly. It is forced to be a hawk due to the unexpected acceleration of inflation, while the continuation of the monetary restriction cycle puts lending institutions at risk. The value of their assets amid rising bond yields is declining, which makes it difficult to issue new loans.

Quarterly GBPUSD trading plan

After all, Chancellor of the Exchequer, Jeremy Hunt, thinks the BoE should focus on curbing inflation, and I agree with him. I believe that the central bank will raise the rate to 4.25% and remain decisive, supporting the GBPUSD rally towards 1.26 and 1.28. The recommendation is to add up to the long trades entered at 1.2115.

Price chart of GBPUSD in real time mode