Pound has gone too far. Forecast as of 27.10.2021

If the market does not move in the direction expected, it is more likely to move in the opposite direction. The inability of the GBPUSD bulls to consolidate the price above 1.379 is a sign of their weakness and a reason for entering sales. Let us discuss the market outlook and make up a trading plan.

Weekly pound fundamental forecast

The previous head of the Bank of England, Mark Carney, was called unreliable and was accused of misleading the markets about future rate changes. However, Andrew Bailey can easily surpass him. According to HSBC, the current head of the BoE will be among those who will vote against raising interest rate at the November 4 meeting. But he said that BoE would have to react to prevent inflation from accelerating! Is there another unreliable person in the UK?

The market’s faith in increasing borrowing costs by 15 bps at the next MPC meeting and another 100 bps by the end of 2022 was seriously undermined, which prevented the GBPUSD from consolidation above 1.379. Traders can also forget about the update of October highs. Investors are wondering how the interest rate can be raised amid the return of the Brexit topic (London officials say that Brussels’ efforts to fix Northern Ireland problems are insufficient, which could trigger a trade war), the increase in the number of COVID-19 cases, the energy crisis and the extremely slow recovery of the UK economy?

On the other hand, the dynamics of the British 2-year bond yield signals that sterling is obviously undervalued. Thus, the actual increase in borrowing costs at the November BoE meeting may become the basis for entering GBP purchases. 

Dynamics of GBPUSD and UK bond yields

    

Source: Bloomberg.

The debt market readings go against the forecasts of Bloomberg experts, who expect to see GBPUSD at level 1.37 at the end of 2021, compared to 1.43 four months ago. The rise in bond yields is also saddening for the Treasury, which has tripled its debt levels compared to 20 years ago and is now considering how it will service them. Despite the fact that the Bank of England gained independence in 1997, it still reports to the government. Now the most aggressive monetary restriction in the last 100 years (markets expect the interest rate to rise to 1.25% by the end of 2022) may cause problems for Andrew Bailey with the Treasury.

However, at the moment, investors are focused on the issue of raising borrowing costs at the November 4 meeting. HSBC claims that the MPC will keep the rate unchanged by 7 to 2 votes, and Andrew Bailey will be among the opponents of the raise. Former Bank of England officials have also questioned the tightening of monetary policy, arguing that in the past, before raising the repo rate, there were always dissenters in the Monetary Policy Committee. Since the beginning of the pandemic, they have not voiced their position.

Weekly GBPUSD trading plan

In my opinion, expectations of aggressive actions by the central bank at the next meeting have gone very far. The pound may pay for it. Moreover, the USD feels confident. The epidemiological situation in the United States is beginning to improve, economic data is encouraging, inflation is still high, so expectations of a Fed rate hike in the fall of 2022 may shift to an earlier period. This will contribute to the decline of the GBPUSD price in the direction of level 1.36. I recommend entering short trades.

   

Price chart of GBPUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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