The Treasury’s strategy to allocate significant resources towards infrastructure investments, along with the release of the UK labor market report, will exert pressure on the GBPUSD rate. The pair’s trajectory still depends on capital flows. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The Labour Party is ready to announce fiscal stimulus measures.
- The OECD has lowered its GDP forecast for the UK.
- Non-resident purchases of US Treasuries are unprofitable.
- Long trades on the GBPUSD pair can be considered during a pullback.
Weekly Fundamental Forecast for Pound Sterling
The Labour Party government, which is experiencing a decline in public support, faces a critical decision. Chancellor Rachel Reeves will present a plan to allocate billions of pounds toward infrastructure investments. Their primary objective is to support the UK economy, which is experiencing challenges due to increasing political uncertainty in the US. The GBPUSD pair is poised to experience another period of turbulence due to the government’s plans to allocate additional budgetary resources to certain sectors, which necessitates reductions in other areas.
The city’s recent tax increases and amended fiscal rules have generated an additional £113 billion, which the government should allocate responsibly. Should the market sense a catch, the events of 2022 might repeat themselves, with a sharp rise in UK bond yields, a collapse of the pound sterling, and the resignation of Liz Truss’s government. Conversely, effective allocation of funds will be crucial for stabilizing the economy.
OECD Forecasts for Major Economies
Source: Bloomberg.
The OECD has adjusted its GDP forecasts for the UK, lowering them from 1.4% to 1.3% for 2025 and from 1.2% to 1.0% for 2026. The estimate for next year is significantly lower than the 1.9% forecast by the Office for Budget Responsibility. The Paris-based organization cites heightened trade uncertainty, tighter financial conditions, and the ineffectiveness of the UK government’s policies as key factors in its decision. Service prices have remained high due to the implementation of a £26 billion payroll tax and an increase in the minimum wage.
The Bank of England is exercising caution due to the acceleration of consumer prices. Following the UK regulator’s lowering of the interest rate to 4.25% in May, the derivatives market is forecasting a prolonged pause in the monetary expansion cycle, with the possibility of another rate cut in 2025 at best. However, as Andrew Bailey notes, exercising caution does not necessarily guarantee rationality. Should the BoE perceive any indications of potential economic turbulence, it will take decisive action.
In my view, a substantial cooling of the labor market is imperative for the Bank of England to recalibrate its approach. According to forecasts by Bloomberg experts, unemployment is expected to grow modestly from 4.5% to 4.6%, and wage growth is predicted to remain at 5.5%. These projections indicate that the current economic climate may not be as challenging as initially feared.
If the GBPUSD pair successfully navigates Rachel Reeves’ test and British employment data does not reveal any unexpected developments, the pound is expected to stabilize. Its performance against the US dollar will continue to be influenced by capital flows. The decision of British investors to cease profiting from US Treasury bond yields, considering hedging, is a favorable development for the pound sterling.
10-Year Treasury Bond Yield and Hedged Currency Risk
Source: Wall Street Journal.
Weekly GBPUSD Trading Plan
Coupled with the erosion of confidence in the US dollar, all these factors are contributing to capital flows from North America to Europe and Asia, providing a strong argument in favor of maintaining the upward trend in the GBPUSD pair. The first of two bullish targets at 1.36 and 1.38 has been reached. The pullback should be used for purchases.
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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