In November, investors believed in the BoE rate hike. In early December, they didn’t believe it. But everything happened exactly the opposite. What else to expect from the Bank of England, and how will its unpredictability affect the GBPUSD? Let us discuss the market outlook and make up a trading plan.
Weekly pound fundamental forecast
What happened once may never happen again. But what happened twice will happen a third time. The Bank of England has surprised investors with its monetary policy decisions twice at the last two MPC meetings. Markets can expect a surprise from it in February. In February, derivatives forecast the bank rate to rise to 0.5%, the critical point at which the BoE would have the right to stop reinvesting the proceeds of maturing bonds.
The right decision at the wrong time. This is how the Bank of England’s verdict on the first interest rate hike in December in the last three years can be characterized. By itself, the rise in borrowing costs from 0.1% to 0.25% is unlikely to seriously slow down the British economy, but it will help cool inflation expectations. The end of QE and the start of monetary restriction are good reasons. Moreover, chief economist Huw Pill answered whether a further rate hike is expected that he thought it was true. He feels uncomfortable at the current 5.1% inflation rate, the highest since September 2011.
In theory, the GBPUSD should rise as the BoE tightens its policy faster than the Fed. This concerns not only the expectations of a rate hike in February compared to the expected increase in the federal funds rate in June, but also touches upon the unwinding the balance sheets of central banks. The BoE can stop reinvesting the proceeds of maturing bonds from its quantitative easing programme once it raises interest rates to 0.5%, which could be referred to as quantitative tightening. The Fed is far from such aggressive steps.
If the biggest buyer exits the UK bond market, the UK bond yields will be rising faster than the Treasury yields, which should support the GBPUSD bulls. However, the UK has far more problems than the US, both political and economic, so the BoE can well find a pretext to put off the next rate hike.
In addition to Brexit, there are unresolved issues, suggesting the US won’t lift its tariffs on UK metal imports. Boris Johnson’s approval ratings fall due to mistakes in the fight against the pandemic, and the scandal about the violation of isolation rules by government members during one of the parties increases the chance of his stepping down as the leader of the Conservative Party. Political risks will press down the pound. Furthermore, the sterling is sensitive to changes in global risk appetite, and a decline in the S&P 500, typical for January, could encourage investors to sell the GBPUSD. And a cherry on top, there is a record growth in COVID-19 cases, followed by lockdowns, which could slow down the UK GDP.
Weekly GBPUSD trading plan
Therefore, the problems of a political, investment, and epidemiological nature, as well as the unpredictability of the Bank of England, set back the GBPUSD bulls. If the price falls below 1.3245 or the rebounds from the resistances at 1.33 and 1.332, one could enter short trades.