The British pound has faced a roller coaster ride over this summer, influenced by political developments, the recovery of the UK economy, and the commencement of the Bank of England’s monetary expansion cycle. What are the potential next steps? Let’s discuss this topic and make a trading plan for the GBPUSD pair.
The article covers the following subjects:
Highlights and key points
- Britain’s labor market remains strong despite slowing wages.
- The UK economy is one of the G7 leaders.
- The Bank of England is in no hurry to cut rates after the start in August.
- The level of 1.283 is the line in the sand for the GBPUSD pair.
Weekly fundamental forecast for pound sterling
Is the British pound poised to regain ground? In July, the currency recovered its position in the Big Ten currency race, bolstered by the Labour Party’s victory in the parliamentary elections, a robust recovery in the UK economy, and the Bank of England’s cautious approach. However, investors doubt that the Labour Party can achieve the projected 2.5% GDP growth. The reduction of the repo rate from 5.25% to 5% since the pandemic and the deterioration in global risk appetite reversed the GBPUSD‘s bullish trend. Fortunately, the situation changed once more in August.
It is often said that the devil is in the details. It appears that the deceleration in Britain’s average wage from 5.8% to 5.4% in April-June, along with the deceleration in services inflation to 5.2%, the lowest level since May 2022, should have negatively impacted the GBPUSD pair. Long-anchored services prices, an unwillingness to allow wages to slow, and a rebound in GDP to 0.7% QoQ in Q1 presented obstacles to a repo rate cut. If indicators confirm disinflationary dynamics, there may be an opportunity to loosen monetary policy in September.
UK inflation change
Source: Financial Times.
However, investors noted the unexpected decline in unemployment from 4.4% to 4.2% and the increase in employment, indicating that the labor market remains robust. Furthermore, wage growth is outpacing inflation, indicating that real incomes are increasing and fostering optimism about GDP acceleration. This is positive news for the Labour Party, which has pledged to make the UK the most highly performing member of the G7.
It is clear that this approach is proving effective. The second quarter saw a 0.6% expansion in gross domestic product, giving the UK the lead and reducing the likelihood of the Bank of England easing monetary policy to less than 50% in September. For the remainder of 2024, the derivatives market anticipates a 46 bp decline in the repo rate, a figure that stands in contrast to the 100 bp reduction seen in the US. This presents a compelling case for purchasing the pound.
G7 economies’ performance
Source: Bloomberg.
The pound’s traditional strengths are once again becoming evident. The UK economy is one of the fastest-growing in the G7, the Bank of England is not inclined to accelerate its monetary expansion cycle, and the Labour government is more stable than Donald Trump’s team, which may return to power. Furthermore, if the Fed shifts its focus from inflation to the labor market, the Bank of England can do the same.
Weekly GBPUSD trading plan
Traders should take into account the factors of growing volatility, potential decline in global risk appetite, and reassessment of the market’s views on the federal funds rate. Therefore, the GBPUSD‘s return to the 1.263-1.283 consolidation range will create a selling opportunity. However, while the pair is trading above 1.283, long trades can be opened.
Price chart of GBPUSD in real time mode
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