Pound revealed a secret. Forecast as of 09.11.2023 | LiteFinance

If rates have reached a peak, we need to figure out when they will start dropping, which central banks don’t like: market expectations of a “dovish” turn make their life complicated. Let’s discuss that and make a trading plan for GBPUSD.

Weekly fundamental forecast for pound sterling

Central banks are at the finishing line of monetary restrictions and ready to start “hawkish” talks to protect markets against rate-cut expectations, which would loosen financial conditions and prevent them from efficiently fighting inflation. The Fed and the ECB proclaim loudly that borrowing costs will remain on a long-lasting plateau. So, the BoE chief economist’s statement that the REPO rate will be cut in the middle of 2024, which has dropped the GBPUSD quotes, is even more surprising.

Interestingly, Huw Pill is the person who compared Table Mountain in Cape Town with a further direction of monetary policy. He said the famous flat-top mountain in South Africa should symbolize the BoE’s next rate decisions. Rates could be raised further and then cut. Or, they can be held on a long-lasting plateau, but inflation will edge back to 2% all the same. The chief economist affirms now that keeping rates on the current restrictive levels makes sense.

After those comments, the derivatives market revised a forecast for a REPO rate cut from 30 basis points to 75 basis points in 2024, which collapsed the GBPUSD quotes.

Market expectations of REPO rate cut


Source: Bloomberg.

Not only did Huw Pill start talking about lowering borrowing costs, but he also presumed that inflation levels in Great Britain would soon be comparable with those in other developed economies. Consumer prices are expected to fall below 5% in the coming months.

Inflation trends in Great Britain

Source: Bloomberg.

The pound’s weakness looks logical after such statements by the BoE’s economist: up to that moment, the market expected the BoE to start loosening policy later and act slower than its peers from Washington.

After Huw Pill’s speech made a bombshell, the BoE head attempted to smooth the situation. Andrew Bailey noted that the BoE wasn’t discussing rate cuts even though the markets may have their own opinion about further Repo rate trends. Since inflation is high, borrowing costs should remain at higher levels for a long time.

I think US and GB rates haven’t reached their peak yet. Even if they are falling at the same pace and time, the GBPUSD is still likelier to rise than fall because the USD has lost its “American exclusivity” trump amid slowing economy and growing risk appetites — unfavourable factors for safe-haven assets, such as the greenback.

Weekly trading plan for GBPUSD

The pound will likely continue rallying against the USD, although many potential risks, including US government shutdown, recession threats, and US presidential elections, may harm the GBPUSD bulls. Until then, it makes sense to build up longs opened at 1.22 on breakouts of resistance at 1.2305.

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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