In the fourth quarter, the decline in the GBPUSD was not attributable to the differential timing of rate cuts by central banks; it was primarily driven by the loss of momentum in the UK economy. It is important to consider whether these developments could have been more severe. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The UK economy has not expanded in the second half of the year.
- Monetary policy gives no advantage to either the pound or the US dollar.
- A Santa Claus rally in the stock market may help the pound sterling.
- Short trades can be opened if the GBPUSD pair fails to return above 1.2575.
Weekly Fundamental Forecast for Pound Sterling
During the first half of the year, the UK GDP growth rate outperformed the entire G7, and the pound maintained its dominant position in the Forex market. However, in the summer, the economy experienced a slowdown, failing to expand in the third quarter. The Bank of England anticipates a continuation of this stagnation in the fourth quarter. Consequently, GBPUSD quotes collapsed by 6.7% from the levels reached in September, and the British currency’s prospects of becoming the top currency of the year have faded.
UK GDP Growth
Source: Bloomberg.
The Bank of England is facing a challenging environment characterized by zero expansion of gross domestic product and accelerating inflation to its highest point since March, leading to a stagflationary climate. This has prompted the regulator to adopt a cautious approach. In December, three instead of one MPC members voted in favor of lowering the repo rate, in contrast to the prediction made by Bloomberg experts. Andrew Bailey expressed concerns that increased uncertainty hinders the BoE’s ability to commit to the timing and magnitude of monetary policy easing.
Inflation in UK, US, and EU
Source: Financial Times.
The derivatives market projects a 50 basis point decline in the cost of borrowing in the UK by 2025, contrasting with an estimated scale of monetary expansion as high as 100 basis points in October. These projections are similar to the anticipated reduction in the federal funds rate, indicating that neither the British pound nor the US dollar will benefit from the speed of monetary policy easing.
The potential gains for GBPUSD bears are linked to the anticipated divergence in economic growth between the UK and the US. The fiscal stimulus and deregulation policies implemented by the Trump administration will likely stimulate the US economy, while trade tariffs could potentially hinder its overseas trade partners. While the UK might be less impacted due to its negative trade balance with the US, which could mitigate the risk of new tariffs, a slowdown in the global economy could still pose challenges for the UK.
The export-oriented nature of the UK economy means that the British pound, like the euro, is considered a pro-cyclical currency, meaning it reacts sensitively to global GDP growth. The Bank of England’s rates are among the highest among the G10 central banks, which means that the pound sterling is a risky asset. This may encourage GBPUSD bulls to push the pair higher at the turn of 2024–2025.
Weekly GBPUSD Trading Plan
As the Santa Claus rally approaches, the S&P 500 index typically experiences an uptick, which could potentially lead to a pullback in the GBPUSD rate. If the pair breaches the resistance level of 1.2575, it may start a correction and allow traders to open short-term long trades. If bulls fail to push the price above the resistance, it will confirm their weakness. Against this backdrop, one can open short positions, adding them to the ones formed at 1.26, with the target at the 1.22 mark.
Price chart of GBPUSD in real time mode
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