Markets expected the Bank of England to raise its policy rate to nearly 5%, but those expectations may be overly optimistic. Meanwhile, the Fed is likely to tighten monetary policy more quickly, potentially creating conditions for the GBP/USD to decline. Let’s examine the latest developments and develop a trading strategy.
The article covers the following subjects:
Major Takeaways
- Geopolitical risks influence BoE rate hike expectations.
- Lower oil prices reduce pressure for rate hikes.
- The Bank of England is following the Fed’s lead, weighing on the pound.
- Short positions can be opened if the 1.325 support is pierced.
Weekly Fundamental Forecast for Pound Sterling
The Bank of England’s decision to raise its policy rate to 4%—the first increase in three years—met little reaction from investors. Despite one of the nine Monetary Policy Committee members voting for a 50-basis-point hike and inflation projections signaling a hawkish stance, the GBP/USD pair moved lower. The BoE is following the Fed’s lead, while much of the pound’s positive outlook already appears priced into the exchange rate.
BOE Inflation Forecasts
Source: Bloomberg.
Andrew Bailey made any further monetary tightening dependent on developments in the Middle East, stressing that it was too early to view November’s rate hike as the start of a sustained tightening cycle. Meanwhile, oil prices had fallen more than 20% from their six-month highs, prompting derivatives markets to scale back expectations for further rate increases. Nevertheless, following the BoE’s hawkish rhetoric, the implied probability of another hike in December rose to 50%.
Likelihood of BoE Rate Hike in December
Source: Bloomberg.
However, markets continue to dictate the pound’s direction, and the outlook is becoming increasingly challenging. Central banks tend to move in tandem, with the Federal Reserve often setting the pace. As a result, stronger-than-expected US inflation data has raised expectations of further monetary tightening not only by the Fed but also by the Bank of England. At one point, the implied probability of a December rate hike reached 70%.
However, these expectations may be excessive. Combined with the fact that several factors supporting sterling—including the resilience of the UK economy and political stability—are already priced into the exchange rate, this has contributed to a sell-off in the GBP/USD.
The outlook depends not only on monetary policy decisions by the Fed and the BoE and the relative pace of economic growth in the US and UK, but also on the adoption of artificial intelligence. Bloomberg estimates that new technologies account for a quarter of the UK’s GDP growth. However, progress so far has been driven largely by investment in the necessary infrastructure rather than widespread adoption. Broader implementation ultimately delivers productivity gains. The US is considerably ahead in this area, helping underpin the dollar’s strength against other major currencies.
The pound has become a casualty of heightened expectations for aggressive Fed tightening. At the same time, renewed demand for the US dollar is prompting investors to unwind their long GBP/USD positions more aggressively. This selling pressure could intensify if October’s US Producer Price Index (PPI) data reveals a significant acceleration in producer prices.
Weekly Trading Plan for GBP/USD
Market sentiment has shifted considerably. A rebound from the resistance levels of 1.3300, 1.3320, or 1.3345, or a break below the 1.3250 support level, could provide opportunities to open short positions in the GBP/USD.
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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