The GBPUSD rally over six of the last seven trading days on Forex came as a complete surprise to many banks and investment companies. Will it continue? Let us discuss the Forex outlook and make up a trading plan
Weekly pound fundamental forecast
After the GBPUSD prices reached a 5-month low at the end of the second decade of July, many banks and investment companies jumped from the bulls’ camp to the bears’ one. The reasons for this were the resuscitation of the Brexit topic, the increase of number of COVID-19 cases, disappointing GDP statistics and the UK PMI data, as well as the dovish stance of the BoE. It seemed that sterling was ready to go to the bottom, but it doesn’t work that way!
Boris Johnson took a big risk, opening the economy on July 19, because a further deterioration in the epidemiological situation could lead to new lockdowns. It looks like the decision to rely on vaccination is paying off! With about 56% of the UK adult population fully vaccinated and almost 70% receiving at least one dose, the third wave of COVID-19 turned out to be much less terrible than the previous ones. The number of COVID-19 cases is declining, and the IMF raises its forecast for UK GDP for 2021 by 1.7 pp to 7%. This is the best economic growth since 1980!
Dynamics of COVID-19 cases in the UK
Source: Trading Economics.
Dissatisfied with numerous checks in the Irish Sea, London threatened Brussels to use Article 16 of the EU Withdrawal Act, which provides for the possibility of any party to suspend checks unilaterally if they cause serious economic and (or) social damage to the state, and asked for the introduction of a waiting regime. The European Union has announced that it is suspending the next stage of the trial, which started in March, and Bloomberg’s insider claims that negotiations will continue throughout the summer. As a result, the degree of political risks decreased, and the pound grew against the US dollar during six of the last seven trading days on Forex.
While most members of the BoE’s Monetary Policy Committee believe that premature withdrawal of monetary stimulus could be costly for the economy, at least two officials are hawkish. The vote to keep the previous QE volumes at 7 to 2 at the BoE’s August meeting is a bullish driver for the pound. Markets now believe the BoE will do more efforts to normalize monetary policy faster than the Fed over the next 18 months.
Dynamics of the expected rate hike
In my opinion, the GBPUSD rally, all other things being equal, may continue until August 5 due to expectations of BoE’s hawkish signals, followed by a sell on the facts.
Weekly GBPUSD trading plan
The mid-term outlook for the pound does not look as good as it is now. The influence of doves in the MPC is higher than in the FOMC, and negotiations on the Northern Irish checks have been postponed but not terminated. In my opinion, if the GBPUSD bulls manage to overcome the resistance at 1.395 and 1.397, the risks of continuing the rally to 1.408-1.409 will increase, so it will be possible to enter sales. Closing the day below 1.3925 is a sign of sellers’ weakness and a reason for entering shorts.
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 LiteForex. 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.