Pound adds up to uncertainty. Forecast as of 30.03.2022

Unlike the Fed, the Bank of England does not intend to aggressively raise rates. The British regulator wants to take the time. Divergence in monetary policy plays into the hands of the GBPUSD bears. However, the future of the currency pair is uncertain. Let us discuss the Forex outlook and make up a trading plan.

Weekly pound fundamental forecast

The world economy is full of paradoxes. If the intention of Turkish President Recep Tayyip Erdogan to fight inflation by loosening monetary policy was perceived as a disease, then a similar BoE’s position is approved by investors. According to Andrew Bailey, due to high inflation, UK households will face an unprecedented decline in income, ultimately leading to a reduction in demand and … lower inflation. The BoE may pause its monetary tightening as rising energy prices are beyond its control.

Andrew Bailey’s references to uncertainty and big historical shocks forced the derivatives market to lower future interest rate growth expectations from 145 bps to 135 bps in 2022. Even though investors still expect borrowing costs to hit 2% this year, their forecasts for the future make the GBPUSD price fall. Derivatives are signaling a rate cut by 25 basis points over the next two years, the most aggressive since 2007. It’s a real paradox: the higher inflation climbs, the greater the chance of monetary expansion.

Dynamics of interest rate expectations for the next two years


Source: Bloomberg.

Quite recently derivatives market instruments were expecting an increase in borrowing costs by 50 basis points in May at once. Now they do not believe in a 25 bps increase. This fact could not but affect the GBP. Even positive news for all European currencies about the withdrawal of Russian troops from Kyiv, which Moscow considers a de-escalation of the armed conflict, did not help the GBPUSD bulls. While the Fed continues to be aggressively hawkish, the Bank of England is ready to pause the monetary restriction.

The Fed intends to raise the federal funds rate by 50 basis points in May and probably June. Its officials are doing this hoping that such aggressive monetary tightening will slow inflation in the second half of 2022. However, the increase in food and energy prices due to the war in Ukraine makes it doubtful that the CPI and PCE growth rates will begin to fall. As a result, the derivatives market predicts that borrowing costs will rise by 2.1% over the next 12 months. This contrasts with expectations of BoE’s monetary policy changes, hints at divergence, and pushes the GBPUSD price down.

The situation for bulls is exacerbated by the EU’s first WTO lawsuit for allegedly illegal subsidization of green energy projects by the UK and London’s consideration of the fourth deferral of EU import checks. The problems of Brexit are still bothering the pound.

GBPUSD trading plan for a week

Despite the successful entering GBPUSD long trades on the rebound from support at 1.307, purchases look unreliable. Consolidation trading involves frequent reversals, so the inability of the bulls to break out the resistance at 1.3155, 1.319, and 1.324 will allow traders to take profit and enter GBPUSD sales.


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 LiteFinance. 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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