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The pound does not care. Forecast as of 02.12.2022

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The pound’s supposed to be the outsider in Forex because of Brexit, the energy crisis, high inflation, and financial turmoil. However, the GBPUSD has soared to its highest since June. What happened? Let’s discuss that and make a trading plan.

Weekly fundamental forecast for pound sterling

Trends break after a short squeeze. Don’t be surprised that the pound probably benefits the most from the USD’s current weakness, consolidating faster than other G10 currencies. Traders have had the most net shorts in the pound since November 2021, and their mass closing has quickly brought the GBPUSD quotes to the area of 16-week peaks — despite all the negative news from the British economy. 

Most investors expected the pair to quickly reach parity when the pound had collapsed to a new historical trough of $1.035 at the end of September. The conflicting fiscal and monetary policies, the energy crisis, the cost of living crisis, Brexit implications, and the UK GDP’s failure to recover after the pandemic — in contrast to other G7 countries — were supposed to drop the GBPUSD even lower. 

Even more so because foreign investors started to sell British securities, fearing the mini-budget. Non-residents’ net shorts in government bonds reached a new anti-record of £29 billion in September and October, the worst value since the 2008 crisis.

Foreign investors’ investment in British bonds

  

Source: Bloomberg.

Time passed. The British macrostatistics continued worsening. Investors put up with the country’s drowning into a recession, and bearish forecasts prevailed. RBC Capital Market keeps its bearish forecast for the pound amid a fall in the manufacturing sector’s business activity for four consecutive months. However, the chart suggests the forecast is wrong.

Despite the GBPUSD‘s growth in October and November, banks and investment firms recommended that the pair be sold on retracements, hence a record volume of net shorts since November. Now it’s time to dispose of them.

The trigger was Jerome Powell’s speech, in which he avoided sounding like a super hawk. The Fed chair does not seem to worry about weaker financial conditions as much as financial markets expected. If so, stock indexes can grow calmly on expectations of a slowdown in the Fed’s monetary restriction. The related improvement of global risk appetite helps such currencies as the pound because Great Britain can easier attract money to reduce the current account deficit.

Financial conditions, oil, and bond yields

Source: Reuters.

Weekly trading plan for GBPUSD

The main reasons for the pair’s rally are the mass closing of speculative net shorts in the pound sterling and a weaker dollar. The pound repeatedly ignores negative news from the UK economy and its probable recession. At the same time, the pound’s “seasonal” power may add fuel to the fire: the UK currency consolidated in 27 out of 47 latest cases in December. Use the GBPUSD‘s pullbacks to 1.215 and 1.2075 to open long positions.

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 LiteFinance. 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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