Pound got some more work. Forecast as of 27.05.2022

While the Bank of England was considering a pause in monetary policy tightening, the Treasury decided to give it some more work by introducing new fiscal stimuli. How will it affect the GBPUSD and other related pairs? Let’s discuss it and make a trading plan.

Weekly fundamental forecast for the pound sterling

The pound failed to drop below $1.2, just like the euro failed to reach parity with the USD. Despite all current problems in the UK economy, the GBPUSD is getting stronger as investors are running away from the US dollar. Rumour has it that the Federal Reserve may pause a monetary restriction, but it’s the BoE that has recently been the first “applicant” for having a rest as soon as possible.

The UK business activity index fell May to its lowest in the past 15 months — the lockdown levels, — which is the fourth most drastic downturn in its history. Together with Andrew Bailey’s neutral statements, that was supposed to bury the GBPUSD bulls. Bank of England Governor mentioned that the regulator had already raised the Repo rate four times and was ready to do that again, however, still trying to estimate by how much inflation would reduce. The BoE has to cope with a double risk of high prices on the one hand and a recession on the other hand. So it has to be careful and make decisions from meeting to meeting.

UK Business activity

Source: Financial Times.

Bailey says the British economy faces an enormous negative impact of the rise in prices of imported goods, primarily energy resources, on real incomes. The government decided to introduce a 25% tax on oil and gas producers’ unexpected profits and thus provide a £15 billion support to households struggling with soaring energy bills.

Berenberg believes the new fiscal stimuli will hold demand at higher-than-expected levels as the BoE will have to raise rates more aggressively. That may cause a recession while growing unemployment rates will harm the economy more than high energy prices. Capital Economics also believes that the support package will help households but make the BoE work harder, forecasting a rise in borrowing costs to 3% in 2023. The repo rate is expected to grow from 1% to 2.25% by the end of 2022.

The GBPUSD has soared to monthly highs on the information about new stimuli and the first assessment of their impact on monetary policy. However, not all think that Rishi Sunak’s financial aid package is pro-inflationary. Citi predicts that a £400 discount on energy bills will reduce consumer prices’ growth pace by 1.3% by the end of the year, compared with what was expected. As a result, inflation might not exceed 10%, and the BoE will have another reason for a pause.

Inflation in Great Britain


Source: Bloomberg.

Weekly trading plan for GBPJPY and EURGBP

The primary reason for the GBPUSD‘s rally is a weak dollar, but the Fed and the BoE have the same problems. So, it’s rational to sell the pound sterling against the currencies whose banks are just starting or will have to start a monetary restriction. GBPJPY shorts and EURGBP longs with targets at 157 and 0.865 look interesting.

Price chart of EURGBP 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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