The euro's sell-off on France's fiscal crisis could raise concerns about the pound. The UK government will present its new budget at the end of October. For now, though, GBP/USD is holding steady. Let's examine the current market environment and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The UK economy is growing faster than predicted.
- Inflation is at risk of rising to a 9-month high.
- The Bank of England is poised to raise rates in November.
- Consider selling the GBP/USD pair once it pulls back from 1.3365 and 1.344.
Weekly Fundamental Forecast for Pound Sterling
Political stability, stronger macroeconomic data, and the Bank of England’s decision to stop selling bonds from its balance sheet helped GBP/USD recover. The pound rose against the euro for the third week in a row. France, unlike Britain, is still far from political stability, and the ECB is increasingly worried that higher interest rates could seriously damage the eurozone economy.
UK Economic Performance
Source: Reuters.
This summer, UK GDP growth year-on-year was the strongest since October 2022, and the monthly figure came in above Bloomberg's consensus forecast. The faster the economy grows, the more freedom the Bank of England has to tighten monetary policy.
Andrew Bailey argues that high energy prices have not yet affected core inflation. However, he has also warned that the longer the conflict in the Middle East lasts, the harder it will be to avoid raising interest rates. The derivatives market is pricing in a 93% chance of a rate hike in November, supported by expectations that consumer inflation will speed up to 3.4% in September, the fastest pace in nine months.
UK Inflation Trend
Source: Bloomberg.
BoE Chief Economist Huw Pill is trying to curb optimism about GBP/USD, saying that hopes for a 100-basis-point rise in interest rates over the next 12 months are unfounded. However, economists surveyed by Bloomberg expect the next hikes in November and February, which bolsters the pound. Now the main concern is whether the pound can stay stable once the UK budget is unveiled.
At the end of October, the Labour government will present its budget. There was earlier speculation that a major welfare reform would require significant tax increases. However, markets calmed down after Prime Minister Andy Burnham scaled back his spending plans.
Banks are expected to bear most of the tax burden, and this has reduced volatility in the pound. The derivatives market does not seem to see the budget presentation to Parliament as a major risk. Investors still remember the 2022 crisis that brought down Liz Truss's government, but for now they see little chance of a repeat.
The pound is in the spotlight as the UK releases data on the labor market, inflation, retail sales, and business activity. Investors will use these figures to gauge where interest rates are heading. Upbeat figures would be a signal to buy sterling. What remains unclear is against which currency.
Weekly Trading Plan for GBP/USD and EUR/GBP
The US dollar sell-off is unlikely to go much further. As a result, strong UK data can be used to sell GBP/USD on a pullback from resistance of 1.3365 and 1.3420. Moreover, in this case, one may consider adding to short positions in EUR/GBP, targeting 0.8350 and 0.8225.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of GBPUSD in real time mode
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