Pound skating on thin ice. Forecast as of 19.10.2023

The caution of the Bank of England, stagflation in the UK, and the crisis in the Middle East are pressing the pound down. Following a short correction up, the GBPUSD resumed falling and will hardly turn up in the near future. Let us discuss the Forex outlook and make up a trading plan.

Weekly Pound fundamental forecast

The Bank of England will hardly be satisfied with the stabilization of inflation at elevated levels and the growth of wages in the UK close to a record. The most aggressive monetary tightening in decades is not working. Further raising the interest rate is dangerous and scary. The economy is showing bad signs and is unlikely to grow in the third quarter. As a result, the BoE has to balance the need to reduce CPI to the 2% target and avoid a recession. So, the GBPUSD downtrend is naturally developing.

In September, consumer prices in the UK grew by 6.7%, at the same rate as in August. Core inflation slowed from 6.2% to 6.1%, while services inflation accelerated from 6.8% to 6.9%. All three indicators exceeded the forecasts of Bloomberg experts and strengthened the market in the opinion that the Bank of England will either increase the Bank rate or keep it at the 5.25% plateau for a very long time. According to Capital Economics, stabilizing inflation coupled with continued record wage growth suggests that the BoE is unlikely to ease monetary policy until the end of 2024.

The UK inflation is the highest among G7 countries, and labour shortages due to Brexit and the pandemic mean that wages in the UK are rising faster than in the US or the euro area. In July-September, the wage growth, including bonuses, slowed down from 8.5% to 8.1%, excluding them — from 7.9% to 7.8% on an annualized basis. But it is still near a record-high level.

Dynamics of inflation in European countries and USA

However, neither high inflation nor the associated rally in UK bond yields supported the GBPUSD. The market is wary of the BoE restarting its monetary tightening cycle in early November. The UK economy is too weak and may not withstand the 15th rate hike in the cycle. GDP expanded by a modest 0.2% in August after contracting 0.6% QoQ in July. Gross domestic product is likely to contract or show zero growth in the third quarter.

Thus, the most pronounced stagflation in the UK compared to other advanced economies sets back the pound bulls. The Bank of England will provide no support to the GBPUSD buyers. The situation is exacerbated by the crisis in the Middle East, which is pushing oil prices higher, increasing fears of a return of the energy crisis to Europe, and reducing the likelihood of a UK inflation slowdown in 2024.

Weekly GBPUSD trading plan

Thus, the GBPUSD should go below the October low unless the US dollar weakens. When the low is broken through, one could add up to the shorts entered on the correction. The downside target at 1.195 is still relevant.