As a rule, monetary policy easing is a negative factor for the currency. However, GBP/USD quotes rose for a long time ahead of the Bank of England’s December meeting. Let’s discuss these topics and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The Bank of England will cut rates in December.
- Banks are optimistic about the pound.
- The fiscal policy has calmed the bond market.
- Long positions on the GBP/USD pair can be opened with targets of 1.35 and 1.358.
Daily Fundamental Forecast for Pound Sterling
What do the UK and the US have in common, apart from sharing the same language? They are both planning to cut interest rates, unlike most other major central banks, which have made a hawkish U-turn. The trajectory is roughly the same: the futures market expects two rate cuts from the Fed and the Bank of England over the next 12 months, with a slim chance of a third. Nevertheless, major banks are forecasting a rally in the GBP/USD pair. Where does this enthusiasm for the pound come from?
Major Banks’ Forecasts for EUR, JPY, and GBP
Source: Bloomberg.
In fact, sentiment towards the currency is changing. The pound fell until November amid expectations of a negative reaction from the debt market to the draft budget. However, Rachel Reeves managed to reassure bond traders. Buying the news began after selling the rumor. The Bank of England’s reduction of the repo rate will further stabilize the situation. The government’s debt servicing costs will decline, and investors will demand a lower premium for the risk of holding UK assets.
Nevertheless, a softer monetary policy is a bearish factor for the currency. Therefore, the slowdown in UK inflation from 3.6% to 3.2% in November triggered a sell-off in the GBP/USD pair. The futures market is confident that the Bank of England will cut rates twice by April. Investors believe that one of the MPC’s hawks will move to the dove camp, leading to a resumption of the monetary expansion cycle in December after the autumn pause.
UK Inflation, Unemployment, and BoE Interest Rate
Source: Bloomberg.
Notably, the BoE has every reason to lower the repo rate. The regulator expected inflation to be 3.4% and GDP to be 0.3% in November. In fact, the CPI came in at 3.2%, and the economy contracted for the second month in a row. If we add to this the rise in unemployment to a five-year high of 5.1% and the first slowdown in average wages to less than 4% since 2020, monetary policy easing becomes a must.
The only question is what signals will the central bank send about its future steps? According to Bloomberg, there is already significant negative sentiment surrounding the pound, so a hawkish surprise would strengthen it against most major currencies. In my opinion, Andrew Bailey’s hints at continuing monetary expansion will set the stage for divergence in monetary policy between the ECB and the Bank of England.
German and UK Two-Year Bond Yields
Source: Bloomberg.
Indeed, while German bond yields are rising amid expectations of an increase in deposit rates by the end of 2026, their British counterparts are falling.
Daily Trading Plan for GBP/USD and EUR/GBP
The Bank of England’s hawkish cut will allow traders to buy the GBP/USD pair with targets of 1.35 and 1.358. Conversely, Andrew Bailey’s dovish rhetoric will create an opportunity to open long positions on the EUR/GBP pair if it breaks through the resistance level of 0.879.
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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