Pound may collapse against dovish BoE decision. Forecast as of 20.06.2024 | LiteFinance
The Bank of England does not play political games and will not give a hand to the ruling party. At the same time, the repo rate cut to 5% from 5.25% is unlikely to save the Conservatives from defeat. Let’s discuss these topics and make a trading plan for GBPUSD.
Weekly fundamental forecast for pound sterling
The UK has become the first coutry to bring inflation back to the 2% target, but the Bank of England will not cut the repo rate at its June meeting. The BoE should thank the Prime Minister for keeping borrowing costs at 5.25%. With parliamentary elections scheduled for July 4, Rishi Sunak has ruled out the possibility of launching monetary expansion before that date. On the one hand, the central bank is not playing political games or siding with the Conservatives. On the other hand, a 25bp rate cut is unlikely to save the Tories from defeat.
While the slowdown in US consumer prices has severely hurt the US dollar, the decline in UK CPI growth from 2.3% to 2% in May could hardly harm the British pound. Contrary to the Bloomberg forecast, stubborn services inflation remains above 5.5%, pushing the GBPUSD quotes higher. After the indicator grew to 5.7%, the derivatives market reduced the probability of the Bank of England monetary policy easing in August from 50% to 30%. The estimated scale of monetary expansion in 2024 decreased from 50 to 44 bps.
UK inflation change
Source: Bloomberg.
At the beginning of the year, the derivatives market expected the leading global central banks to conduct five or six acts of monetary easing in 2024. Today, they anticipate one or two of them. The British pound increased on forecasts that the Bank of England would be the slowest to cut rates due to higher inflation. It strengthened against most major world currencies thanks to a stronger-than-expected economy and investor confidence in the Labor Party’s victory in the general election. In the first quarter, UK GDP unexpectedly soared by 0.6%. It is projected to slow to 0.2% in the second quarter, though another surprise is not out of the question. Much will depend on retail sales and business activity data.
Bets on central banks’ interest rates
Source: Bloomberg.
As for the June BoE meeting, investors will traditionally look for hints from the central bank on the timing and scale of the monetary expansion. Two out of nine Monetary Policy Committee members voted to lower the repo rate to 5% in May. If there are more doves this time, it will deal a blow to the GBPUSD pair. The markets will wait for clarification from Andrew Bailey, who previously argued that the moment of monetary policy easing is near.
The Labor Party’s victory in the elections is obvious, but if it becomes unconditional, as in Mexico, the pound risks sharing the fate of its Mexican counterpart. Fears about this make investors hedge against British assets and currency collapse risks. Against this backdrop, the GBPUSD quotes are declining.
Weekly trading plan for GBPUSD
The Bank of England’s reluctance to take action will unlikely help the pound sterling, as the regulator is expected to do about as much as the Fed. On the contrary, if the BoE braces to make a more dovish turn than the markets predict, the pound’s failure to return above 1.2715 will signal that bulls are losing their grip. Against this background, one can sell the currency with the targets at 1.264 and 1.259.
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.
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