Pound takes part. Forecast as of 16.03.2023

2023.03.16 2023.03.16
Pound participates. Forecast of 16.03.2023

Dmitri Demidenkohttps://www.litefinance.org/blog/authors/dmitri-demidenko/

The better performance of the British economy than expected and the greater stability of the British banking system compared to the US and the euro area suggest a positive outlook for the GBPUSD. Let’s discuss the Forex outlook and create a business plan.

Weekly fundamental pound forecast

Everything is interconnected in the financial markets, and the pound was not left out of the turmoil due to failures in the American banking system. After similar problems began in Europe, the fall in Credit Suisse shares weakened sterling against the dollar but strengthened its position against the euro. Investors may have thought that the British banking system was stronger than in the euro area, but their reasoning should be seen as a temporary factor. Much more important for the GBPUSD is the answer to the question of whether the panic in the markets will make the BoE move away from the plan to raise the interest rate.

Just a week ago, derivatives gave a 90% chance of a rate hike at the Bank of England’s March meeting. Now the chances of a 25 basis point rate increase have dropped to 40%, while the probability of keeping it at the same level of 4% has increased to 60%. Investors believe that Andrew Bailey and his colleagues will give more importance to market fluctuations than fiscal stimulus from the Chancellor of the Exchequer, Jeremy Hunt.

Dynamics of expectations for BoE interest rate

source: Bloomberg.

Under normal circumstances, the Treasury’s decision to invest £20 billion a year in the British economy could be perceived as an argument in favor of further inflation acceleration and a reason to continue the BoE’s monetary tightening cycle. However, the current conditions are unusual. The banking crisis started in the United States, and Europe did not stand aside.

The new draft budget looks optimistic. The government, seeing positive developments in the British economy, which the IMF considers the worst among the G7 countries, and the Bank of England does not predict its recovery to pre-pandemic levels before 2026, proposed new tax benefits for business investment, decided increase military spending and provide financial support to individuals who decide to return to work.

Dynamics of economic efficiency in UK, USA, and euro area

source: Financial Times.

According to the UK Office for Budget Responsibility (OBR), UK GDP in 2023 will fall by a modest 0.2%, which is significantly better than the previous forecast of -1.4%. Inflation is expected to fall from the current 10.1% to 2.9% at the end of December. The numbers look very optimistic and encourage Jeremy Hunt to claim that the British economy is proving its strength.

When the banking system looks stronger than in the US and the euro area and the economy is stronger than expected, the Bank of England could continue its monetary tightening cycle, supporting the pound. This scenario will be more likely if the Fed starts to address the problems of US credit institutions and keeps the markets believing in a dovish change.

Weekly business plan for GBPUSD

In this scenario, it makes sense to buy the GBPUSD if the price breaks the resistance at 1.2115. The continuation of the banking crisis and similar problems in other countries and regions will make it important to sell the GBPCHF and GBPJPY with targets at 1.095 and 156.5. On the contrary, if the Fed and other regulators manage to solve the problems quickly, it will be important to buy EURGBP.

GBPUSD price chart in real time mode