While Kevin Warsh has left the US dollar without a clear direction, the Bank of England’s continued hawkish rhetoric is giving the pound a clearer path forward. Let’s examine the situation and develop a trading plan on the GBP/USD pair.
The article covers the following subjects:
Major Takeaways
- The Bank of England intends to keep the repo rate unchanged.
- The BoE’s forward guidance supports the pound.
- Geopolitical risks are not weighing on sterling.
- If the GPB/USD pair exceeds 1.3385, long trades can be opened.
Fundamental Forecast for Pound Sterling for Today
The Bank of England is expected to leave the repo rate unchanged at 3.75% for a fifth consecutive meeting while keeping the door open to further policy tightening. This comes despite a marked slowdown in UK inflation. At the same time, expectations that Governor Andrew Bailey will strike a hawkish tone at the post-meeting press conference are bolstering the GBP/USD pair.
British Inflation Rates
Source: Bloomberg.
From February to June, UK inflation eased from 3% to 2.6%. Over the same period, inflation accelerated from 2.4% to 3.5% in the US and from 1.9% to 2.8% in the Eurozone. Inflationary pressures in the UK remain contained by tight financial conditions, government support for household electricity bills, and a weak labor market, which has limited wage demands compared with the US and the Eurozone.
Nevertheless, the Bank of England cannot ignore the risk of renewed conflict in the Middle East. Oil and gas prices have risen since the previous MPC meeting, adding to inflation risks. As a result, markets have raised expectations that the BoE will tighten monetary policy further. Derivatives currently imply a 65% probability of a repo rate hike in September and price in two rate increases by the end of the year.
Oil and Natural Gas Trends
Source: Bloomberg.
According to Commerzbank, the rally in Brent crude has not weighed on either the euro or sterling. Unlike in the US, higher energy prices in Europe are fueling inflation expectations and reinforcing the prospect of further monetary tightening by the ECB and the Bank of England. DBS Group argues that this contrasts with the Fed’s less decisive stance and gives bulls an edge in EUR/USD and GBP/USD. Kevin Warsh, meanwhile, has added uncertainty to the US dollar’s outlook.
That is why expectations that Andrew Bailey will maintain a hawkish stance are supporting the pound against the US dollar. A more hawkish-than-expected split within the MPC could provide additional support for GBP/USD. Most Bloomberg economists anticipate two of the Committee’s nine members—Hugh Pill and Megan Greene—to vote for a repo rate hike, citing concerns that higher energy prices could feed into core inflation through second-round effects. If more members join the hawkish camp, the British pound is likely to extend its rally.
The GBP/USD pair would not have surged had Kevin Warsh not signaled that he is in no hurry to raise interest rates. Instead, he believes markets should do the Fed’s work by tightening financial conditions. That has raised doubts about the Fed’s independence and put pressure on the US dollar.
Trading Plan for GBP/USD for Today
The Bank of England’s hawkish stance, together with a growing number of dissenting MPC members, may boost the GBP/USD pair. So, consider long trades if the price breaks above 1.3385.
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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