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GBP/USD outlook: Potential decline amid rate cut expectations

gbpusd analysis, forex trading

In recent days, the GBP/USD exchange rate has tested the resistance level of 1.2700, largely due to the retreat of the US dollar. This movement suggests a temporary weakness in the dollar, providing an opportunity for the pound to gain some ground. Despite this upward movement, experts are predicting a significant sell-off for the pound, expecting it to drop below 1.25 USD by autumn at the latest.

Analysts attribute this forecast to a combination of factors, including potential interest rate cuts in the UK and a more hawkish stance from the US Federal Reserve. These elements are likely to create downward pressure on the pound, reversing its recent gains. Therefore, the question arises: what can we expect for the GBP/USD exchange rate in the upcoming weeks and months?

Recent data from the UK shows that the CPI inflation rate suggests a slowdown in the disinflation process within the British economy. This indicates that while inflation is not accelerating, it is not decreasing as quickly as expected. Despite these inflationary pressures, investors are skeptical about the Bank of England's ability to maintain a hawkish stance.

With the UK economy facing a slowdown, there is a growing belief that the Bank of England may follow the lead of the European Central Bank and initiate a cycle of interest rate cuts, potentially starting as early as June. This anticipated shift in monetary policy reflects the central bank's response to weaker economic conditions and the need to stimulate growth.

At its May meeting, the Bank of England decided to keep interest rates steady at 5.25%, a move that maintained the status quo. However, this decision was not without significant developments. Notably, Dave Ramsden joined Swati Dhingra in voting for interest rate cuts, resulting in a 7-2 vote in favor of maintaining the current rates. This shift indicates a growing divide within the Monetary Policy Committee and suggests an increasing openness to rate cuts in the near future. The Bank of England also revised its inflation projections downward and hinted that the economy might remain stagnant throughout the year. These factors together pave the way for a potential rate cut in June, reflecting a response to persistent economic challenges.

Experts are cautious about the recent rebound in the GBP/USD exchange rate, indicating that it lacks strong underlying support. They argue that as soon as the US dollar begins to strengthen again, the pound is likely to fall back to around 1.25 USD. This prediction is based on the expectation that the current economic conditions in the UK do not justify a sustained increase in the pound's value. The anticipated rate cuts and the ongoing economic difficulties suggest that any temporary gains in the pound may be short-lived, leading to a significant decline once the dollar regains its strength.

"Interest rate cuts in the UK are just a matter of time," say analysts, who are closely watching the upcoming inflation report expected at the end of this month. This report will provide crucial insights into the inflationary pressures within the UK economy and could be a decisive factor in the timing of interest rate cuts. While the Bank of England has forecasted the first rate cut for August, some analysts believe that this could happen as early as June.

They argue that the Bank of England may need to act sooner rather than later to address the economic slowdown. Given the current economic fundamentals, the Bank of England might indeed lower rates more quickly than the US Federal Reserve. In this context, the pound is expected to be particularly vulnerable following the initiation of rate cuts, potentially falling to 1.25 USD by the summer.

Looking at the United States, there is an expectation of an economic slowdown, but persistent inflation is likely to limit the extent of the Federal Reserve's rate cuts. The first rate reduction by the Fed is anticipated in September. This ongoing inflationary pressure suggests that the Fed will proceed cautiously, balancing the need to support economic growth with the necessity of controlling inflation. As a result, the recent losses experienced by the dollar in global markets are expected to be quickly recovered. Additionally, geopolitical factors could play a significant role in restoring the dollar's favor among investors.

One such geopolitical factor is the upcoming US presidential election. Analysts believe that a victory for Donald Trump would be positive for the US dollar, potentially boosting its value. This expectation is based on Trump's previous economic policies, which were seen as favorable to economic growth and market confidence. Therefore, the election outcome could significantly influence the dollar's performance in the latter part of the year.

Economists at Danske Bank share a similar perspective, suggesting that differences in the pace and extent of interest rate cuts between central banks will be the main factor influencing the broader currency market for the remainder of 2024. They believe that the Bank of England will be more aggressive in cutting rates this year than widely expected, which will weaken the GBP/USD exchange rate to 1.23 over the next six months.

This forecast is based on the expectation that inflation in the UK will continue to decline and that the political climate will support further rate cuts. Consequently, during the Bank of England's June meeting, analysts anticipate a rate cut as well as announcements of additional cuts in the near future. This aggressive approach to monetary policy is expected to exert downward pressure on the pound, contributing to its depreciation against the dollar.

gbpusd analysis, forex trading
GBP/USD daily chart, MetaTrader, 19.05.2024



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