The Bank of England’s sluggishness buoyed the GBPUSD pair during most of 2024. However, this bullish factor is no longer effective as the UK economy cools amid the impending trade wars. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The Fed and the Bank of England maintain the same pace of monetary expansion.
- Divergence in economic growth is dragging the pound down.
- Trade wars are a clear negative factor for the UK.
- The GBPUSD’s correction will set the stage for selling with a target of 1.23.
Weekly Fundamental Forecast for Pound Sterling
The acceleration of consumer prices in the UK to 2.3% from 1.7% and the Bank of England’s slow pace of monetary policy easing should have created compelling reasons to buy the British pound. However, GBPUSD quotes slumped to the six-month low, hitting the bearish target of 1.25. It may sound like a paradox, but when the Trump trade reigns in the Forex market, all other drivers fade into the background.
UK Inflation Change
Source: Bloomberg.
As a rule, high prices are a sign of a strong economy. However, there are situations where GDP is growing slowly, and the CPI is rising rapidly. We are talking about stagflation, which the UK may experience soon. Against this backdrop, the Bank of England will have to make tough decisions.
On the one hand, the BoE is forecasting an acceleration of consumer prices to almost 3% in 2025, which will prompt it to act extremely slowly on the path of monetary expansion. The futures market expects the central bank to cut the repo rate by 70 bps in 2024-2025, half as much as the ECB and about the same as the Fed. The same pace of monetary easing gives no advantage to either GBPUSD bulls or bears. Meanwhile, economic growth is a different matter.
After the UK PMI Composite slumped below the critical 50 mark in November and retail sales contracted more than expected in October, the country has taken a step towards stagflation. Keeping interest rates unchanged is a highly undesirable course of action. The Bank of England may come under pressure.
The situation may worsen due to the negative impact of Donald Trump’s protectionist policies. With an insignificant trade surplus with the US of £4.6 billion over the past 12 months, the UK is less vulnerable to Trump’s policies than Canada, Mexico, or China. Moreover, the country’s GDP is services-oriented. However, exports of services are higher than elsewhere, and the negative impact of trade wars on the Eurozone, the UK’s main trading partner, is certain to have a negative impact on its economy as well.
Services Exports by Different Countries
Source: Financial Times.
Weekly GBPUSD Trading Plan
The potential for a slowdown in UK GDP growth due to trade wars and the acceleration of its US counterpart as a result of fiscal stimulus paint a challenging future for the GBPUSD pair. The divergence in economic growth will continue to exert downward pressure on the pair. The correction due to the Trump trade retreat presents an opportunity to establish short positions on a rebound from the resistance levels at 1.268-1.27, 1.2765, and 1.2835, or at the level of 1.263 if the pair returns below the support level. The 1.23 mark remains the target.
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.
{{value}} ( {{count}} {{title}} )
This post is originally published on LITEFINANCE.
