Due to geopolitical considerations, the US dollar has once again demonstrated an inverse correlation with the S&P 500. The recent de-escalation of the Israeli-Iranian conflict has increased risk appetite globally, creating a tailwind for the GBPUSD pair. Let’s discuss and draft a trading plan.
The article covers the following subjects:
Major Takeaways
- The Bank of England intends to lower the repo rate in August.
- Stagflation in the UK does not bode well for the pound.
- The US dollar is falling due to increased risk appetite.
- Long trades on the GBPUSD pair can be considered with targets of 1.405 and 1.435.
Monthly Fundamental Forecast for Pound Sterling
Every cloud has a silver lining. The UK labor market and economy are cooling, inflation is rising, and the threat of stagflation is forcing the Bank of England to respond quickly and proactively. In June, three out of nine MPC members voted to lower the repo rate, exerting pressure on the pound. At the same time, the conflict in the Middle East has led to a resumption of the inverse correlation between the US dollar and US stock indices. Given the sustained risk appetite, the GBPUSD pair is likely to continue its rally.
At its June meeting, the Bank of England decided to maintain the repo rate at 4.25%, citing geopolitical uncertainty as the primary factor in its decision. The Israeli-Iranian conflict, along with the subsequent surge in oil prices, could spur inflation in the UK. Andrew Bailey has already been compelled to explain to the Treasury why consumer prices exceeded the target by one percentage point. According to the BoE head, elevated inflation has a transient nature.
Central Banks’ Interest Rates
Source: Bloomberg.
Three MPC doves voted for easing monetary policy. One of them, Sir Dave Ramsden, anticipates that the cooling of the labor market will eventually decelerate inflation in the services sector. He believes that this risk is higher than the likelihood of further acceleration in consumer prices.
The market had anticipated only two votes in favor of lowering the repo rate in June. This has led to an increased likelihood of resuming the monetary expansion cycle in August, with an 80% probability. Investors are almost certain that this will happen at the end of the summer, which should weaken the pound sterling. However, the GBPUSD pair is in a favorable position, with its counterpart appearing to be relatively weak.
Market Expectations on BoE Rate Cuts
Source: Bloomberg.
The “sell America” strategy that dominated financial markets in April and May began to falter amid escalating armed conflict in the Middle East. The primary source of tension has shifted from the United States closer to the Strait of Hormuz. This shift in market sentiment has contributed to the resurgence of the US dollar as a preferred safe-haven asset, a development that bodes well for the US.
If Donald Trump is keeping a close eye on the US stock indices, Treasury Secretary Scott Bessent is promoting lower oil prices and US Treasury bond yields. This is particularly relevant in the context of a weaker US dollar. Due to the ongoing conflict between Israel and Iran, the US administration has achieved its objectives. Equity prices are on the rise, while Treasury yields, Brent crude oil prices, and the US dollar are declining. Given these circumstances, the British pound has a significant opportunity to gain ground.
Monthly GBPUSD Trading Plan
The GBPUSD pair pulled back to the support level of 1.339, rebounded, and then broke through the resistance level of 1.3475, enabling traders to establish long positions. As a result, long positions should be maintained. The previously indicated target of 1.38 is not relevant. The targets should be shifted to 1.405 and 1.435.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of GBPUSD in real time mode
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