Economic weakness following tax increases, aggressive rate cuts by the Bank of England, and even Rachel Reeves’ resignation as Chancellor. Bears are coming up with all sorts of reasons to sell the GBP/USD pair. Nevertheless, the pound continues to gain ground. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Capital outflows could hurt the pound.
- The Bank of England will cut the repo rate twice to 3.5%.
- Rachel Reeves will not step down as Chancellor.
- Long trades on the GBP/USD pair can be opened with targets of 1.358 and 1.368.
Weekly Fundamental Forecast for Pound Sterling
When there are too many pessimists in the market, you can expect a surge. GBP/USD bears, who are clinging to their forecasts, look bleak. So do bulls who are closing their positions. Morgan Stanley has done just that. According to the bank, the pound’s rally will be short-lived, and the gains made after the budget announcement will quickly fade away. The pound has no new growth drivers. Meanwhile, it soared against the US dollar to its highest level since the end of October.
The lack of fresh drivers is far from the only reason why bears are trying to defend their forecasts for the GBP/USD pair. Eurizon SLJ Capital recommends selling the pound due to capital outflows from the UK. When the most productive part of the economy, the rich, is taxed to subsidize the less productive, the poor, it is not a healthy development. Standard Chartered believes that the Bank of England will lower the repo rate to 3%, rather than to 3.4% as currently expected by the futures market. Finally, Ebury is alarmed by Rachel Reeves’ resignation.
Share of Taxes and Spending in UK Budget
Source: Bloomberg.
The Chancellor really did find herself in an extremely vulnerable position. The Office for Budget Responsibility stated that Rachel Reeves had known about stronger forecasts for the British economy since the summer. Nevertheless, she scaremongered about a bigger budget deficit than was actually the case and the possibility of an income tax increase. In other words, she deliberately misled the public in order to ensure a positive reception of the draft budget in the future. Apparently, this is not a reason for her to resign.
As for the Bank of England’s aggressive easing of monetary policy, the OBR predicts that Rachel Reeves’ measures will slow inflation by 0.5%, Bloomberg puts the figure at 0.4%, and BoE chief economist Huw Pill at 0.3% in 2026, followed by an acceleration of 0.1% in 2028. Meanwhile, the Bank of England will unlikely cut the repo rate more than twice in the cycle. Most likely, it will fall to 3.5%, as predicted by the OECD. Moreover, the first act of monetary expansion will take place in December and is already factored into GBP/USD quotes.
Global Central Banks’ Interest Rates
Source: Bloomberg.
Despite tax increases, the OECD has raised its GDP forecast for the UK to 1.2% in 2026 and expects economic growth of 1.3% in 2027. These figures place the UK third or fourth among the G7 countries in terms of GDP growth. It is not as bad as pound bears say. The sooner they abandon their forecasts, the higher the pound will soar.
Weekly GBPUSD Trading Plan
While bears are fleeing the market, long positions on the GBP/USD pair can be considered, adding to those formed at 1.3095 and 1.326. The bullish targets are 1.358 and 1.368.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of GBPUSD in real time mode
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