The Bank of England disappointed investors in November and is ready to do it again if the UK jobs report is disappointing. Why would the British regulator use hawkish rhetoric? Let us discuss the market outlook and make up a GBPUSD trading plan.
Weekly pound fundamental forecast
If a person lied once, they can believe him. It won’t work the second time though. And if later a person tells the truth, no one will accept it either. The statement of the Bank of England, which claimed before the November MPC meeting that it was ready to act, and then decided not to raise the interest rate, as expected, brought down the GBPUSD price to 1.35. After that, the pound tried to recover, but was pushed even lower to the lowest levels since December, due to the release of US inflation data for October. The British central bank is again talking about tightening monetary policy, but will investors believe it a second time?
Markets rise on expectations and fall on disappointments. The good news in the form of a possible increase in the interest rate from 0.1% to 0.25% was taken into account in sterling prices thanks to Andrew Bailey’s hawkish rhetoric. This was followed by a sell-off on facts. Also, a correction occurred again, provoked by the speeches of BoE officials. The head of the Bank of England said that monetary policy will still be tightened, and the reason the Committee did not do this in November is a lack of information. The decision, as I noted, was made blindly, because there was about a half-month left until the important UK jobs report.
As a result, investors continue to believe that the interest rate will rise in 2021. They expect borrowing costs to rise to 1% by the end of 2022. This is slightly lower than the 1.25% projected before the November MPC meeting, but still quite high. By comparison, CME derivatives suggest that the federal funds rate will only rise to 0.75% next year.
Dynamics of expectations of interest rate changes
Why should the Bank of England constantly use hawkish rhetoric? Because without it, the pound is doomed. The slowdown in the UK economy, fiscal consolidation, high commodity prices and the return of the Brexit problem makes pound positions extremely vulnerable. Its weakening is an additional factor in favor of stimulating inflation, which the BoE would not like.
According to the National Institute of Economic and Social Research, UK GDP will slow down from 6.9% in 2021 to 4.7% in 2022 and to 1.7% in 2023. In the third quarter, economic growth rates fell to 1.3%, which is slightly lower than the estimates of Bloomberg experts and the Bank of England at 1.5%. It is currently 2.1% less than it was at the start of the pandemic.
Dynamics of the UK GDP and forecasts for the economy
The prolongation of the conflict over Northern Ireland puts pressure on the sterling. London is threatening to use Article 16 of the Brexit Agreement, which any party can resort to if it believes the agreement has caused serious economic, social or environmental difficulties. Brussels promises to respond with an arbitration claim, tougher checks at the border and even suspending the Agreement on Trade and Cooperation.
Weekly GBPUSD trading plan
Alas, the pound is still standing only thanks to the Bank of England, which cannot always be trusted. At the same time, a strong UK jobs report may inspire GBPUSD bulls to strengthen. At the same time, focus on sales while the pair is trading below 1.346.
Price chart of GBPUSD in real time mode
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