The resurgent US dollar and rumors about the interest-rate cut by the Bank of England provoked a correction in GBPUSD. The pullback was short-lived, and the pound is ready to restore the uptrend. What’s next? Let us discuss the Forex outlook and make up a GBPUSD trading plan
Fundamental pound forecast for six months
Once the Brexit talk ended, the British pound returned to the game of betting. Investors are closely following the economy and the Bank of England representatives’ comments discussing the possibility of the interest-rate cut below zero. Dovish stance drove the GBPUSD price down below 1.35. As soon as the hawks got down to business and the US dollar weakened, the GBPUSD pair soared to the top of the 36th figure.
The chief of BoE Andrew Bailey says that even a successful Brexit would cost the UK around £80bn, or about 4% of GDP in the long run, according to an analysis by the Fiscal Responsibility Office. Along with the tense epidemiological situation and the third lockdown in a row, this suggests that the British economy will continue to recess. Such statements have led money markets to believe that the Bank of England will lower the interest rate below zero in August. Moreover, MPC member Silvana Tenreyro said that the regulator was brainwashed, claiming that he could not reduce rates to the negative area. It’s not too late to do it now.
Countries using negative interest rates
Nevertheless, as soon as Andrew Bailey said that such a policy has numerous drawbacks, and his deputy Ben Broadbent specified that negative rates would damage bank margins, market expectations of the interest-rate cut below zero shifted from August to December, and the pound perked up. Broadbent noted that Britain’s economy could be more robust than macro statistics suggest. The current recession is unique. The GDP growth is the weakest ever, and retail spending growth is almost the strongest.
Thus, the MPC members’ talks about monetary policy made GBPUSD pair price fluctuate insanely, and its movements accelerated because of the growing demand for the US dollar, with its subsequent extinction. Greenback disappointed skeptics with a rally in US Treasury yields that quickly faded after the auctions.
Indeed, the pound has accumulated many problems. The recession, the threat of a Scottish independence referendum, and the fact that the Brexit agreement mainly affects goods, while the colossal services sector continues to experience difficulties due to uncertainty and COVID-19. Nevertheless, a significant part of the political risks has sunk into oblivion, trade weighted GBP index is below historical averages. This, in turn, should support the pound in the context of the dispersal of international trade after the victory over the pandemic.
Trade weighted GBP index
GBPUSD trading plan for six months
Let’s not forget about the mid-term weakness of the US dollar. It is caused due to the passiveness of the Fed, low Treasury yields, and hatred of investors for safe-haven assets amid expectations of further improvement in global risk appetite. These circumstances allow me to adhere to the December forecast for the growth of the GBPUSD pair to the 1.4-1.42 area during the first half of the year. I would suggest buying the pound.
Price chart of GBPUSD in real time mode
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