The pound sinks following the dollar. Forecast as of 20.07.2023

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A significant inflationary slowdown in Great Britain hit the sterling hard, just like the US inflationary slowdown affected the USD. What’s next? Let’s discuss that and make a trading plan for GBPUSD.

Weekly fundamental forecast for pound sterling

I've got deja vu. A slowdown of consumer prices from 8.7% to 7.9% y-o-y in the UK in June, the minimum level in the past 15 months, made the sterling collapse. Haven't we seen something similar lately? Remember, the USD dropped against major currencies in mid-July as the US CPI slowed to 3% in June. The same happened to the GBPUSD.

Real UK inflation data came in above Bloomberg's expectations for the first time in the past five months. The slowdown made the derivatives market downgrade the expected REPO rate ceiling to 5.85%, which was estimated at 6.5% two weeks ago. UK bond yields dropped, and stock indexes grew on expectations that the Bank of England won't strangle the economy too much, tightening the policy.

Market expectations for REPO rate peak

The chance of raising borrowing rates by 50 basis points from 5% to 5.5% in August declined from 60% to 40% as consumer prices and core inflation growth pace slowed. The derivatives market predicts the REPO rate will likely rise by 25 points. At the same time, the BoE won't scrap its plans to tighten policy in September and November, Bloomberg says.

Although the CPI slowed, it still looks better than in Europe and the US. The ECB and the Fed are expected to have one or two tightening acts before the cycle ends. Still, the BoE has more work to do, also because wages are growing rapidly amid the lack of workforce caused by Brexit-associated disruption of economic relations. June's inflation data won't allow Andrew Bailey to chill out.

UK, US, and eurozone's inflation trends

However, note that a further fall in consumer prices in Great Britain will reduce a projected REPO rate ceiling, putting pressure on the GBPUSD amid nearing the end of the Fed's tightening. The sterling has already lost the leading position in the G10 currency race because of June's inflation and risks falling further behind the Swiss franc, a new leader.

A global inflation slowdown is a good signal for procyclical currencies, including the pound sterling. A soft landing in the US, China’s economic recovery, and zero eurozone’s and Great Britain’s recession will lay a solid foundation for global GDP growth. Moreover, considering high wages and prices, the Bank of England will hardly fail to raise the REPO rate to 5.75%. These circumstances and nearing the end of the Fed's tightening limit the GBPUSD's corrective potential.

Weekly trading plan for GBPUSD

The pair's return above 1.299-1.301 or retracement from support at 1.28 should be used to open medium-term longs in the GBPUSD.

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