Home Market Pound: nothing comes without cost. Forecast as of 14.07.2022

Pound: nothing comes without cost. Forecast as of 14.07.2022


Doubts of BoE’s officials due to mixed macro statistics and political uncertainty created problems for the GBPUSD. In addition, the Fed’s bold actions make the US dollar feel like a leader in Forex. Let us discuss the Forex outlook and make up a trading plan.

Monthly pound fundamental forecast

Unfortunately, nothing will save the GBPUSD from falling to the lowest levels since the beginning of the pandemic. Almost all of the 11 candidates for the post of prime minister promise to cut taxes. The BoE head Andrew Bailey guarantees an unconditional victory over inflation. All these factors should support the pound. However, the GBP is up against a very strong opponent.

The US dollar is dominating Forex. According to Bank of America, USD’s growth drivers, such as the Fed’s aggressive monetary restriction, high energy prices, a sell-off in stock markets, and China’s weakness, continue to work out. Most likely, the Fed will change its policy in the fourth quarter, when the regulator starts to rely more on data. Up to this point, the American dollar has no competitors.

Dynamics of the US dollar and its exchange rate

Source: Bloomberg.

Even if inflation declines after the June peak of 9.1%, the Fed is unlikely to stop. The regulator’s officials will consider that the rejection of CPI will be temporary. With a strong labor market, significant wage growth will keep inflation at elevated levels, while strong employment growth will act as a safety cushion to the economy. These factors indicate that it will be able to withstand higher rates. The Fed will continue to act decisively, which will contribute to the GBPUSD decline.

Yes, Andrew Bailey has promised that the BoE will tighten monetary policy if necessary and that all options for changing borrowing costs will be presented at its August meeting. Yes, the futures market predicts a 60% rate hike by 50 bps and a 40% chance of a 25 bps increase. However, mixed macro statistics and political uncertainty could hinder BoE’s plans.

The unexpected 0.5% MoM expansion of the UK GDP and the acceleration of manufacturing output to 2.3% YoY in May should have supported the sterling. However, according to the BRC, retail sales fell 1.3% YoY to levels not seen since the start of the pandemic. Households are cutting spending and either switching to cheaper brands or shortening their shopping lists.

The fiscal stimulus promised by most candidates for the UK prime minister should theoretically support the economy, accelerate inflation and push the Bank of England to raise rates aggressively. However, nothing comes without cost. Due to the rejection of the April increase in payroll taxes, the treasury will not receive £18 billion as well as £16bn due to an increase in the corporate tax rate from 19% to 25%. A 1% income tax cut will reduce budget revenue by £6.5 billion.

Monthly GBPUSD trading plan

A predicted 100 bps Fed rate hike in July will push the GBPUSD towards its previously set targets of 1.175 and 1.16. I recommend entering sales.

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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