Pound will pull back the curtain. Forecast as of 02.06.2023

2023.06.02 2023.06.02
Pound will pull back the curtain. Forecast as of 02.06.2023

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

When will the economy feel the effect of the Bank of England’s policy? What will its pain be like? Those are the questions central banks ask when making rate decisions. The answers are crucial to investors. Let’s discuss it and make a trading plan for GBPUSD.

Weekly fundamental forecast for pound sterling

We all know that monetary policy has a delayed effect on an economy. However, no one knows what an effect will be like and how painful it will be, although the answers will influence the Fed’s and the BoE’s decisions. In their turn, those decisions will affect the GBPUSD. Meanwhile, the probability of the fed funds rate hike in June dropped to 29% and catalyzed the pair’s rise to its highest level since mid-May.

Former Bank of England policymaker Michael Saunders believes the British economy has not felt all the pain of policy tightening yet. The peak of pain usually comes a year after the REPO rate has reached its ceiling. As a consumer price growth slowdown turned up smoother than expected in April, the derivatives market estimated the peak of borrowing costs at 5.5%, 100 basis points higher than the current level. Also, according to the NIESR, trimmed-mean inflation reached a new peak of 10.2% in this cycle.

Inflation in Great Britain

Source: Bloomberg.

The higher an estimated rate ceiling rises, the better the currency feels. Thus, the GBPUSD‘s drop in response to the rise of the REPO rate’s projected peak to 5.5% looks illogical. The market has a theory that the pound sterling isn’t popular because the BoE cannot handle inflation. 

Actually, every currency pair includes two currencies. It’s a strong dollar and not a weak pound that is responsible for the GBPUSD‘s collapse. In May, investors gave up the idea of the Fed’s dovish turn in 2023 and bet on further tightening in June. Once Fed vice chair Philip Jefferson started talking about a pause, the opinion changed, weakening the greenback against the major currencies. The pound is no exception. 

Market Expectations of REPO Rates

Source: Bloomberg.

If Washington decides to take a pause at the beginning of summer and London continues tightening, the divergence will push the GBPUSD even higher. 

However, we must remember that the Fed is not a one-man theater, and Philip Jefferson isn’t acting alone. The US central bank makes decisions collectively. If stats on the US labor market and inflation indicate that monetary policy must be tightened further, there will be no pause in June.

Weekly trading plan for GBPUSD

The economic downturn will thus evidence the impact of the Fed’s most aggressive rate hike in decades. The delay I talked about at the beginning is in full play. One of the first indicators will be downbeat data on US employment in May. The growth of around 180 thousand will make the market change its mind about the Fed’s policy tightening in June once and for all and will give us a reason to buy the GBPUSD with a target of 1.26 and 1.264.

Price chart of GBPUSD in real time mode