A robust economy is indicative of a stable currency. The British pound once again demonstrates its resilience and strength, holding a leading position in the G10 currency market. However, the GBPUSD pair has other advantages to offer. Let’s discuss this issue and make a trading plan.
The article covers the following subjects:
Highlights and key points
- UK GDP outperforms its G7 counterparts.
- The Bank of England may postpone monetary expansion.
- Global risk appetite supports the British pound.
- The GBPUSD pair may soar to 1.35.
Weekly fundamental forecast for pound sterling
The Goldilocks scenario is clearly evident in financial markets and the British economy. The country showcases robust GDP growth, the strongest in the G7, boasts a strong labor market, and enjoys decelerating inflation figures. In light of the regular signals indicating a cooling of the US economy, American exceptionalism may give way to British one. Given the current economic landscape, the GBPUSD rally was just a matter of time.
With employment growth reaching its fastest pace since November, unemployment falling, retail sales increasing by 0.5% month-over-month, and GDP outpacing its counterparts in the first half of the year, the Bank of England and the Keir Starmer government can take comfort in these positive economic indicators. The economy is providing them with the opportunity to proceed at a measured pace. Andrew Bailey and his colleagues can continue the cycle of monetary expansion that commenced on August 1. The Labour Party can implement reforms to accelerate the country’s GDP to the pledged 2.5% level.
G7 economies’ performance
Source: Bloomberg.
Meanwhile, the UK’s purchasing manager’s index reached a four-month high of 53.4 in August, pointing to further GDP expansion in the third quarter. The divergence in economic growth between the UK and the US boosts the GBPUSD pair. However, this is not the only factor in the pound’s favor, with the UK once again leading the G10 currency race.
The futures market is indicating a 39% probability of a repo rate cut in September and estimates the scale of the Bank of England’s monetary expansion at 40 bp in 2024. A 25 bp cut in borrowing costs is on the agenda at one of the upcoming BoE meetings, with a 60% chance of continuing the easing cycle at the second meeting. Notably, the figures are not directly comparable with those in the US, where the Fed is expected to cut the federal funds rate by almost 100 bp by the end of this year.
The GBPUSD pair is supported by rising global risk appetite and optimism about the global economic outlook. Europe is poised to assume a greater role in the global economy, and the signals from China are not as dire as before. Pro-cyclical currencies tend to thrive in such an environment, so the pound and euro quite expectedly posted gains.
G10 currencies against US dollar
Source: Reuters.
The US dollar is facing challenges due to the slowdown of the American economy and expectations of aggressive monetary policy easing. In addition, its status as a safe-haven asset, the retreat of the Trump trade, and the return of the carry trade are adding to the pressure. However, Citi believes that the greenback has replaced the yen, which has become the main funding currency.
Weekly GBPUSD trading plan
The GBPUSD‘s future trajectory will be influenced by the insights shared by Jerome Powell at the Jackson Hole symposium. While the Fed chief’s remarks may not align with market expectations, which could lead to profit-taking on long positions and a price pullback, it is better to keep long trades formed above 1.283 open and initiate more long trades on corrections. The potential targets are 1.323 and 1.35.
Price chart of GBPUSD in real time mode
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