The market is underestimating the likelihood of a repo rate hike at the Bank of England’s meeting on September 17. A surprise move by the regulator could support the GBP/USD, allowing the pair to recover in the short term. However, political and fiscal risks could ultimately weigh heavily on the pound. Let’s analyze the current situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- UK inflation has accelerated to 3.1%.
- The Bank of England may surprise the markets in September.
- The pound is not factoring in the risks associated with the new budget.
- Short positions can be opened with targets of 1.3300 and 1.3150.
Weekly Fundamental Forecast for Pound Sterling
The Bank of England is not expected to raise its repo rate at its September 17 meeting, but after two rounds of monetary tightening by the ECB and one by the Fed, the BoE is increasingly lagging behind its peers. The situation is further complicated by accelerating consumer-price growth from 2.9% to 3.1%, a five-month high. If the BoE remains a passive observer, inflation risks climbing toward 4% by year-end. Expectations of a more hawkish stance are helping GBP/USD find a floor following the sell-off triggered by the FOMC decision.
The Fed has traditionally led the pack. If Kevin Warsh justified a federal funds rate hike by pointing to a resilient economy, elevated inflation, and geopolitical risks, why shouldn’t the Bank of England take a similar approach? The UK recorded the fastest GDP growth among the G7 economies in the first half of the year. In the third quarter, Bloomberg economists still expect the UK to remain among the leading performers. Andrew Bailey warned that the conflict in the Middle East could push energy prices and inflation even higher. The arguments for tighter monetary policy are mounting.
GDP Growth in G7 Countries
Source: Bloomberg.
A hike in the repo rate would surprise the market. Bloomberg expects the MPC to vote 6–3 to keep the policy rate at 3.75%. Only three of the 28 respondents expect the number of hawks on the Committee to rise from three to four. At the same time, Andrew Bailey is expected to signal that a new monetary-tightening cycle could begin in November. The derivatives market is already pricing in another four to five rate hikes over the next 12 months—more than currently expected from either the Fed or the ECB.
Market Projections for BoE and ECB Interest Rates
Source: Bloomberg.
Meanwhile, politics could constrain the Bank of England. This autumn, Andy Burnham’s government is set to present its first budget, yet markets appear surprisingly relaxed about the event. In particular, one-month implied volatility for the pound against the euro is at a record low, while two-month volatility has fallen to its lowest level since August.
British Pound Volatility
Source: Bloomberg.
Yet the current situation is painfully reminiscent of events four years ago: high energy prices, rapidly accelerating inflation, a tightening cycle at the Bank of England, and a government eager to win over voters through fiscal stimulus. In 2022, that combination helped send the pound tumbling to a record low against the US dollar. Could history be repeating itself?
Weekly Trading Plan for GBP/USD
Only a rise in the Bank of England’s repo rate would give the GBP/USD room to increase. In this scenario, it would make sense to buy the pair and then consider selling it on a pullback from the resistance levels at 1.3445 and 1.3470. Otherwise, consider opening short positions at market levels, targeting 1.3300 and 1.3150.
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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