A slowdown in the UK economy can cause a reduction in the rate of the Bank of England’s monetary normalization to a minimum. In such a situation, much in the fate of GBPUSD begins to depend on the Fed. Let us discuss the market outlook and make up a trading plan
Weekly pound fundamental forecast
Times change. Once the pound was popular among buyers due to the accelerated vaccination. The UK is now among the leaders in terms of the fully vaccinated population. At the same time, the slower increase in the number of COVID-19 cases in Britain compared to the United States does not worry GBPUSD traders. The government is doing everything possible to accelerate economic growth. Despite the opening of the economy, British citizens are in no hurry to spend money.
Dynamics of global vaccination
Source: Nordea Markets.
What are the reasons for the slowdown in British inflation from 2.5% to 2%, the unexpected decline in retail sales by 2.5% for Bloomberg experts, and the drop in the composite purchasing managers’ index to a 6-month low? Is it all because of fears of the Delta variant or an increased interest in the England national team at Euro 2020? Or is it all due to the bad weather? According to Berenberg, the shortage of staff is a bigger problem for the UK than COVID-19. Pantheon Macroeconomics notes that supply is not the only bottleneck. Domestic demand and export problems are starting to emerge. In the latter case, Brexit is one of the reasons.
The slowdown in the economy could make adjustments to the BoE’s plans to get rid of monetary stimulus. Andrew Bailey and his colleagues intend to raise the interest rate from 0.1% to 0.25% in 2022, and to 0.5% by the end of 2023, after which they will stop reinvesting bond income. The BoE balance will stabilize, and then will begin to decline due to the active sale of securities with an increase in the rate to 1%. Monetary policy normalization is proceeding slowly. At the same time, the Delta variant and the associated GDP slowdown can significantly affect the decrease in the rate of normalization to the minimum.
Dynamics of UK inflation rate and UK interest rate
Source: Trading Economics.
The problem with GBPUSD bulls is that the market has long been determined to raise the interest rate in 2022, while the idea of raising the federal funds rate next year is relatively recent. This fact made traders turn their eyes to the US dollar and contributed to the fall of the analyzed pair to the February lows. In addition, hedge funds are reconsidering their views on COVID-19. Earlier, thanks to vaccines, a quick victory over the pandemic was expected, which made it possible to buy those currencies where vaccination is faster. Today there is no such confidence.
Weekly GBPUSD trading plan
In my opinion, whether old ideas come back or disappear depends on the Fed’s plans. If the Fed does everything right, the economy will continue to grow, the labor market will recover, and inflation will slow down. On the contrary, too fast or slow normalization of monetary policy will cause an economic recession or an unrestrained price increase. In this regard, the speech of the head of the central bank in Jackson Hole is of the utmost importance for all dollar pairs. Jerome Powell’s lack of fear of COVID-19 will encourage the GBPUSD bears to move ahead. Level 1.374 serves as a kind of limit for the pair. The inability of the bulls to consolidate at the beforementioned level is a sign of their weakness and a reason for sales.
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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