Pound posts clear gains. Forecast as of 07.06.2024

June 7, 2024 11:34 am

The Labour Party will highly likely win the general election. However, what if it turns out to be unconditional? Is GBPUSD poised for a collapse, as in the case of the Mexican peso? Let’s talk about this topic and make a trading plan.

Fundamental forecast for pound sterling for today

The British Pound has so far strengthened against the world’s major currencies as investors bet on a Labour victory in the upcoming election on July 4. The markets believe that if this happens, relations with the EU will improve, and government spending will increase, raising the risk of inflation and causing the Bank of England’s repo rate to remain elevated for an extended period. But what if the Labour Party’s victory turns out to be unconditional? Will GBPUSD follow the Mexican peso’s scenario?

Claudia Sheinbaum’s victory and the confidence in her Morena party gaining an overwhelming majority in Mexico’s parliament has rid the peso’s “super” prefix. The currency collapsed on fears of major reforms that would hurt markets. Nomura predicts that in the event of an unconditional Labour victory, that party may abandon its pledge not to raise taxes. As a result, the UK economy, which grew by 0.6%, will lose steam, and GBPUSD bulls will lose an important trump card.

However, such a shock scenario as in Mexico is hardly possible in the UK. The pound has become the flagship G10 currency again. It is not only the election that should be thanked for this. After a series of positive economic reports, the derivatives market has shifted expectations of a repo rate cut for November. The Bank of England’s monetary expansion scale in 2024 is estimated at 32.5 pp, slightly less than the 36 pp for the ECB. A prolonged keeping of borrowing costs unchanged allows UK bond yields to rise and supports the GBPUSD rate.

BoE interest rate and 10-year gilt bond yield

Source: Bloomberg.

Thus, the difference in the pace of monetary easing by the world’s leading central banks is no longer in question, leaving investors to look for other Forex market drivers, including politics and economic growth. In this regard, the high chances of a Labour victory and the outperformance of the UK’s first-quarter GDP compared to its US counterpart are solid arguments for buying the GBPUSD.

Major central banks’ interest rates

Source: Financial Times.

At the same time, the situation can change at any time. If the US labor market strengthens in May, expectations of a September rate cut will be pushed back, forcing investors to turn to the US dollar. On the other hand, a disappointing jobs report will allow JP Morgan and Citigroup to reap the rewards. These banks are clinging to the idea of a Fed rate cut in July.

GBPUSD trading plan for today

The Labour’s victory in the general election is largely factored into the GBPUSD quotes. With an almost empty economic calendar for the UK, the pair will be sensitive to the US employment and inflation data. Therefore, the upbeat Non-Farm Payrolls will allow the pair to pull back. In this regard, traders may close their long trades opened with the target of 1.3. On the other hand, disappointing statistics will allow them to open more long trades above 1.28.

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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