The yen has demonstrated an outstanding performance, while the pound sterling has experienced a contrasting trajectory. Yesterday’s market leader is currently facing challenges amid market turmoil and concerns about the Labour Party pledges. Let’s discuss this topic and make a trading plan for the GBPUSD pair.
The article covers the following subjects:
Highlights and key points
- The Labour Party’s promise to accelerate GDP to 2.5% looks unachievable.
- The Bank of England may accelerate monetary expansion due to market turmoil.
- The pound’s high yield advantage has become its weakness.
- The GBPUSD pair risks consolidating in the 1.263-1.283 range.
Weekly fundamental forecast for pound sterling
The British pound has been experiencing constant ups and downs in the Forex market. In the middle of the summer, the currency appreciated to its yearly high against the US dollar, driven by the Labour Party’s victory in the general elections, the narrowing divergence in the economic growth of the US and the UK, and the Bank of England’s cautious approach to monetary policy normalization. However, as August began, the pound was hit by a series of negative factors, leading to a collapse in the GBPUSD rate to a monthly low.
The Labour Party’s victory was perceived as a positive factor for the British pound, as the country was set to have a stable government for the first time in at least five years. Investors were optimistic about the prospect of improved relations with the EU. Moreover, the party pledged to boost GDP growth to 2.5%, which would have made the British economy the most promising in the G7 bloc. However, forecasts and actual performance may differ. The Bank of England anticipates GDP growth of 1.25% in 2024, while the National Institute of Economic and Social Research projects a slightly lower rate of 1.1% and estimates that growth will remain at or below 1.3% until 2029.
Bank of England’s GDP growth forecast
Source: Bloomberg.
Chancellor of the Exchequer Rachel Reeves has identified a £21.9 bn shortfall in the budget due to the actions of the Conservative Party. However, she has yet to present a comprehensive plan for addressing this issue. The Labour Party has pledged to stimulate the economy while maintaining fiscal consolidation. The apparent contradiction between these goals allows investors to draw parallels with the events of the fall of 2022, when fiscal stimulus from Liz Truss, in the context of BoE monetary restriction, led to a significant decline in GBPUSD quotes. Additionally, the market identified inconsistencies in the proposed approach.
The Bank of England has initiated a cycle of monetary expansion. Despite warnings from Andrew Bailey and Huw Pill, markets are anticipating an aggressive repo rate cut. However, in light of recent events, investors still consider such a move inevitable.
Black Monday, which was triggered by fears of a recession in the US economy, serves as a cautionary example. If a similar scenario plays out, it will have ripple effects across the globe. Following the Fed, other central banks will be forced to sharply loosen monetary policy, and the BoE is no exception.
Major central banks’ interest rates
Source: Bloomberg.
At the same time, the British pound was adversely affected by its status as a high-yielding currency, particularly as a result of the gradual reduction in carry trade transactions. The considerable appeal of British assets, which had supported the currency for much of the year, significantly hit the GBPUSD exchange rate.
Weekly GBPUSD trading plan
The once-raving panic is gradually subsiding in the Forex market. This, coupled with the Bank of England’s cautious approach, will allow the pound to regain ground. However, market expectations of a Fed rate cut are waning, which will bolster the US dollar. As a result, the GBPUSD pair will likely consolidate in the range of 1.263-1.283. Against this backdrop, consider seizing a trading opportunity by buying low and selling high.
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.