Pound is not afraid. Forecast as of 26.07.2023

2023.07.26 2023.07.26
Pound is not afraid. Forecast as of 26.07.2023

Dmitri Demidenkohttps://www.litefinance.org/blog/authors/dmitri-demidenko/

Although the overall economic situation is not positive, the UK economy isn’t doing that badly. Besides, there is a divergence in the monetary policy of the Bank of England and the Fed. Therefore, the GBPUSD might go up above 1.3. Is it real? Let us discuss the Forex outlook and make up a GBPUSD trading plan.

Weekly fundamental pound forecast

It might seem that the slowdown in inflation and weak UK PMI data should have supported the GBPUSD downtrend. Nobody expected the pair to go up above 1.3 soon. However, if you predict the market, you should always look at many sides. The slowdown in consumer price growth can be interpreted as a success for the management of the Bank of England, which is positive for the currency. Purchasing managers’ indexes, on the other hand, are a product of the perceptions of companies that, in the current uncertainty, cannot be good.

First, let’s look at the current environment. Over the past four decades, interest rates have been falling and staying low, reassuring and encouraging consumers. In 2021-2023, the borrowing costs worldwide have been skyrocketing, which exacerbated the cost of living crisis and created a general pessimistic background. Not surprisingly, the PMIs and other soft data in advanced economies are weak, making experts talk about a recession.

The UK has been one of the worst performers among European countries. Due to the rate hikes, the cost of servicing the public debt in this country jumped to 10.4% of total income. This is the highest value among advanced economies.

Dynamics of costs of debt servicing as a share of revenues

Source: Financial Times.

However, the UK had better PMI data in July than other European countries. The updated IMF forecasts note that the UK will avoid a recession because of stronger consumer spending than previously thought. Is the UK no longer the sick man of Europe? Low expectations are great opportunities. Not surprisingly, the pound has been the G10 top performer for a long time and continues to compete for leadership with the Swiss franc.

Yes, a significant slowdown in the UK inflation has cut the expected BoE rate ceiling from 6.75% to less than 6%. Nonetheless, the Bank of England is not going to complete the cycle of monetary tightening, unlike the Fed or the ECB. Monetary policy divergence will continue supporting the GBPUSD bulls.

The pair has rebounded from level 1.28 amid the general market sentiment. Investors are wondering what level the federal funds rate will rise to and how long it will stay there, but they are confident that the process of disinflation is in full swing. This means that the giant jumps in the federal funds rate and the accompanying market volatility are a thing of the past, as well as a strong dollar.

Weekly trading plan for GBPUSD

Thus, the Fed doesn’t have such a strong influence on the sterling any longer; its hawkish tone is not enough to discourage the GBPUSD bulls. I suggest holding up the long trades entered at 1.28 and adding up to them. The targets of 1.34 and 1.36 are still relevant.

Price chart of GBPUSD in real time mode