When the global economy faces major changes, investors tend to shift their focus away from central banks. Meanwhile, financial regulators worldwide have to decide whether to curb inflation or save the economy. Let’s discuss this topic and make a trading plan for the GBPUSD pair.
The article covers the following subjects:
Major Takeaways
- US tariffs and tax hikes will slow UK GDP.
- UK inflation remains at high levels.
- Capital flight is putting pressure on the US dollar.
- Long trades on the GBPUSD pair can be opened with targets at 1.35 and 1.38.
Weekly Fundamental Forecast for Pound Sterling
Nothing is worse than watching your economy die with your hands tied behind your back. This is the situation in which the central banks, with the Fed being the major trendsetter, find themselves. Jerome Powell acknowledged that the financial markets, which have recently experienced a series of sweeping sell-offs due to recession fears, are functioning as expected. In the midst of the most significant tariff hikes since the 1930s, rising inflation and unemployment have become prevalent trends. This situation places the Fed in a tight spot. However, the US regulator is not the only one dealing with this issue.
While the UK’s foreign trade with the US is balanced, London has not escaped a universal 10% tariff and 25% duties on steel, aluminum, and automobile imports. It is anticipated that, over time, these tariffs will hurt the UK economy, which is already experiencing slow growth due to the implementation of higher taxes by the Labour government. This has the potential to hit the labor market, where the unemployment rate currently stands at 4.4%.
Companies have expressed concerns over the potential impact of tariffs, leading to a shift in their hiring plans. However, the labor market remains robust, with wages continuing to rise. Wages increased from 5.8% to 5.9% in the three months leading up to February, spurring the services inflation, which stands at 5%, and exerting pressure on the Bank of England. The derivatives market anticipates a rate reduction in May, though the cycle of monetary expansion is not expected to persist.
US-UK Bond Yield Spread
Source: Bloomberg.
Investors’ confidence in the imminent easing of the Bank of England’s monetary policy is exerting pressure on UK bond yields. In the context of the sell-off of US Treasuries, the rate differential on them is narrowing, which should lead to a decline in GBPUSD quotes. However, the pair is rising.
The rally in US Treasury yields is driven by investors’ aversion to all US assets because of Donald Trump’s intention to make America great again with the help of tariffs. Historically, capital has flowed to the US due to the reliability of the country’s securities. Due to the White House’s policies, which have been characterized by a tendency to create an atmosphere of fear, holders of these securities no longer feel confident, leading to a sell-off. As a result, the US dollar experienced its worst start to a year since 1995.
US Dollar Performance
Source: Wall Street Journal.
While discussions about the UK’s challenges with tariffs or tax increases may persist, it is crucial to recognize the impact of fundamental market shifts on the GBPUSD rate. The persistent weakness of the US dollar, driven by global economic factors, will likely continue to reinforce the British pound. Concerns regarding an imminent recession in the US economy, coupled with a decline in confidence, can destroy the US dollar’s reputation in the Forex market.
Weekly GBPUSD Trading Plan
Against this backdrop, long trades on the GBPUSD pair formed on a breakout of the resistance level of 1.292 can be kept open. The pair will likely soar to 1.35 and 1.38, so traders may consider opening more long trades on pullbacks or on a breakout of the resistance level of 1.327.
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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