Will pound answer for the words? Forecast as of 22.09.2022
At first glance, the Bank of England has an advantage over the Fed, because it will announce its verdict a day later. However, due to the Liz Truss household aid package, BoE may not be so active. Let us discuss the Forex outlook and make up a trading plan for GBPUSD.
Weekly pound fundamental forecast
The Bank of England loses to the Fed in the speed of monetary restriction. This caused the GBPUSD to fall to a 37-year low, so some began to talk about parity. Before the September FOMC meeting, the markets were thinking about 75 bps or 100 bps, while the BoE is considering more modest figures of 50 bps or 75 bps. However, the marginal rates in 2023 are equal to 4.5% in both cases, so at some point the rate of monetary tightening may accelerate. When will it start? Will it help the pound?
At first glance, the Bank of England has the advantage of making its decision after the Fed. Almost double-digit inflation and the collapse of the sterling should force Andrew Bailey to act aggressively. Especially since other central banks are actively raising borrowing costs, and MPC members are talking about decisiveness. With a broad step, the BoE can confirm the word with deed, thus increasing the credibility of the regulator. The 75 bps interest rate hike would be the biggest since 1989, when inflation accelerated rapidly during the consumer boom.
Dynamics of rates of the major central banks
Most of the 47 Bloomberg experts think that the Bank of England will raise the rate by only 50 bps to 2.25%. The main reason is the £150bn emergency energy package from Liz Truss. It should limit the potential for inflation to rise in the medium term. This makes it possible for the Bank of England not to increase the rate of monetary tightening to the maximum.
Moreover, Andrew Bailey does not have the opportunity to assess the size and impact of the fiscal stimulus that Chancellor of the Exchequer Kwasi Kwarteng will present a day after the partly dovish MPC meeting. Most likely, Silvana Tenreyro will vote for a 25 bps increase in borrowing costs.
Theoretically and historically, the combination of tight monetary and stimulating fiscal policy leads to currency strengthening. The pound has confirmed this in the past. However, investors are now so terrified of the energy crisis, recession and current account deficit that they are not attracted by the high yields of British bonds. It will rise even higher as the futures market expects the interest rate at 4.5% in 2023.
Dynamics of interest rate expectations
Weekly GBPUSD trading plan
The reaction of GBPUSD to the verdict of the Bank of England will depend on the size of the step. A 50 bps rise in borrowing costs has already been priced in quotes, so expect the pair to fall. 75 bps can inspire the pound to strengthen. However, it is reasonable to switch from short-term purchases to medium-term sales when the price rebounds from resistances at $1,138, $1,146, and $1.15. The UK economy is too weak to resist the US and expect a trend reversal.
Price chart of GBPUSD in real time mode
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