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It is too early to give up on sterling. Forecast as of 24.06.2021

Before the June FOMC meeting, many central banks feared to leave the pack and followed the lead of the Fed. Much has changed now. How will the change in the Fed’s stance affect the Bank of England and GBPUSD? Let us discuss the Forex outlook and make up a trading plan

Weekly pound fundamental forecast

The Fed gave a free hand to other central banks by announcing an increase in the federal funds rate earlier than anticipated. Most of them did not risk giving signals or normalizing monetary policy, fearing an undesirable strengthening of the national currency against the background of economic recovery. Now everything has changed. You can put your old fears aside and accept the situation with the accelerating inflation.

The Bank of England may become one of the first followers of the Fed. The British regulator is faced with a fast-growing economy and inflation acceleration to 2.1%, which is above the target. The fact that the central bank has regularly underestimated the rate of growth in consumer prices in recent years (in February it predicted them at 1.6%, in May at 1.8%), supports the rally in inflation expectations, which are at their highest levels in the UK over the past 13 years.

Dynamics of inflation and BoE forecasts

   

Source: Financial Times.

Thanks to successful vaccinations, the UK economy looks just as good as America’s. The Bank of England expects it to expand by 7.25% in 2021, which is in line with the Fed’s forecast for US GDP of 7%. At the same time, the proximity of British PMI to record highs indicates that even despite the postponement of the date of the full opening of the economy from June 21 to July 19, it continues to perform well.

Most likely, further lifting of restrictions will contribute to the continuation of inflation and GDP rallies, which allows the BoE to take a more hawkish stance than before. Moreover, the “sausage war” between London and Brussels will soon end. The parties are ready to agree to a truce and extend the grace period, during which the UK will supply chilled meat to Northern Ireland without excessively thorough EU checks, according to the government of Boris Johnson, for another three months.

Money markets are currently expecting a 15 bps hike in the interest rate by June 2022. If the Bank of England takes a hawkish stance due to accelerating inflation, booming economy, and reduced Brexit uncertainty, the chances of an interest rate hike could increase, which will lead to the pound strengthening.

Dynamics of the interest rate expectations

  

Source: Bloomberg.

At the same time, you need to understand that decisions are made by specific people. At a time when the main ”hawk”, Andy Haldane, leaves the Bank of England, and there are plenty of “doves” in the MPC, perhaps we should not expect any discussion about an earlier tightening of monetary policy.

Weekly GBPUSD trading plan

In my opinion, the sterling will show its worth, given its strong economy, fast-growing inflation, and lower political risks. Another thing is that in the short term, the wind on Forex can be very changeable. The BoE’s “hawkish” rhetoric will allow to add up to the GBPUSD longs formed at the level of 1.383 on the breakout of resistance at 1.4. On the contrary, the BoE’s non-haste in adjusting the monetary policy is fraught with profit-taking on the pound after its rally from the 2-month bottom.

    

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 LiteForex. 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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