The Bank of England officials claim that the sterling trend depends on the speeches of the Fed and the ECB. Therefore, the GBPUSD should respond to the US jobs report for February.
Weekly fundamental pound forecast
Inside the Bank of England, there is no consensus on how the interest rate will change further, which makes the pound’s position vulnerable. An MPC member Catherine Mann says that sterling will fall even deeper, as the hawkish comments of Fed and ECB officials have not yet been fully priced into the quotes of the US dollar and the euro. And literally, on the next day, GBPUSD crashes following Jerome Powell’s speech to Congress.
At first glance, the situation in the UK economy is worse than in the euro area or the United States. Consumer prices do not slow down sharply, unlike European or American ones. This forced the derivatives market to raise the expected BoE rate ceiling to 4.8% in early March, which implies a rate hike by another 75 basis points from the current 4%.
Dynamics of inflation in UK, euro area, and USA
Source: Bloomberg.
In fact, when the economy is weak, the CPI rise above 10% is partly due to the low base effect. The most aggressive BoE monetary tightening in decades keeps the recession issue acute, and the central bank should be cautious. Cautiousness is called for by former chief economist Andy Haldane, who, before leaving his post, was one of the main MPC hawks.
The Bank of England governor does not like the too rapid increase in the expected interest rate ceiling by the derivatives market. Andrew Bailey noted that the presumption of the need to increase the interest rate at each subsequent MPC meeting was canceled. It would be a mistake to say for sure if the monetary tightening cycle will continue or end anyway. The BoE monetary policy will depend on the incoming data.
The Bank of England president connects the growth of the expected rate ceiling with the fact that the markets are meeting the Fed’s expectations. Expectations have risen in the USA, so they must rise in the UK as well. Actually, it is not so. Inflation in the US is different, and the economy is also different. The UK GDP could have been 4% higher, but for Brexit.
Dynamics of UK economy
Source: Bloomberg.
The Bank of England is not going to copy the Fed, but the Fed still has an influence on the GBPUSD trends. Catherine Mann is right, the fate of the US dollar, the euro, and the pound depends on whether or not the hawkish rhetoric of central banks is priced in their quotes. Another thing, why should she talk about Forex pricing? The answer is on the surface. According to Mann, a weaker sterling will boost inflation and require more tightening of the BoE’s monetary policy.
Weekly trading plan for GBPUSD
Due to Powell’s hawkish speech, the GBPUSD exited the consolidation range of 1.19-1.22. The US jobs report will determine if the pair should go back or continue falling towards 1.172 and 1.163. Strong employment data from 225,000 new jobs and more will allow selling the pound against the greenback. A weaker-than-expected report will send the pair up to $1.191 and $1.195, where the bears can go ahead again.
Price chart of GBPUSD in real time mode
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