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Positive outlook for GBP amid economic recovery and political stability

gbpusd analysis, forex trading

In the second half of May, the GBP/USD exchange rate is trading above 1.27. This current level reflects a relatively strong position for the British pound against the US dollar. Analysts have observed various economic indicators and market trends to make this assessment. They predict that the strength of the US dollar, driven by its own economic factors and global market dynamics, will likely cause the exchange rate to drop to around 1.25 by the end of 2024. This forecast considers potential policy changes by the Federal Reserve, economic performance in the United States, and broader global financial trends that favor the dollar.

However, the outlook for the following 12 months is more optimistic. Analysts expect a significant rise in the exchange rate to 1.35 by the end of the 2025 year. This optimism is based on the anticipation of a robust economic recovery in the UK, which is expected to gain momentum as the year progresses. This recovery is likely to boost investor confidence, resulting in increased demand for the pound and a corresponding rise in its value.

Regarding the GBP/EUR exchange rate, analytics have forecasted a level of 1.2050 by the end of 2025. This projection aligns with a broader positive outlook on the UK economy, which is anticipated to outperform many of its European counterparts. The forecast is based on the expectation that the UK will experience a stronger economic recovery compared to several European economies. This relative strength is likely to be driven by various factors, including policy measures by the UK government, improvements in key economic sectors, and a resilient consumer base. Forecast suggests that as the UK economy strengthens, the value of the pound will rise against the euro, reflecting the improved economic conditions and investor confidence in the UK's prospects.

The anticipated political stability following the general elections also plays a significant role in this forecast. Political stability is crucial for financial markets, as it reduces uncertainty and promotes a favorable investment climate. The markets typically respond positively to a stable political environment, which can enhance investor confidence and attract more investments. Stable governance can lead to consistent economic policies and reforms that support long-term growth. In this context, the prospect of stable political leadership in the UK post-elections is expected to contribute positively to the value of the pound, reinforcing the optimistic economic outlook.

A key factor in the improved sentiment towards the pound is the decreasing inflationary pressures. Inflation, which has been a significant concern for many economies, affects purchasing power and economic stability. In the UK, as inflation begins to decline, it signals a stabilization of prices and an improvement in economic conditions. Lower inflation rates can boost consumer confidence, increase spending, and support overall economic growth. This reduction in inflationary pressures creates a more favorable environment for the pound, as it enhances the UK's economic outlook and strengthens the currency's value.

Analysts note that investors are increasingly optimistic about the UK's economic recovery prospects. This marks a significant shift in sentiment compared to the persistent pessimism of recent years. Various factors contribute to this change, including positive economic data, successful policy implementations, and improvements in key sectors. The shift in investor sentiment reflects growing confidence in the UK's ability to recover and grow, which in turn supports the value of the pound. As investors become more optimistic, they are likely to increase their investments in the UK, further boosting the currency.

Political stability is another crucial factor in the future performance of the pound. Despite expectations that general elections will be held in the fall, there is also the possibility of earlier elections in July. Both scenarios could provide the desired stability. Political stability is anticipated to boost investor confidence, as a stable political environment is associated with predictable and consistent economic policies. Such stability can lead to increased foreign investments and support the pound’s value. The anticipation of political stability following the elections adds to the positive outlook for the UK economy and its currency.

The potential for the UK economy to respond more effectively to interest rate cuts compared to other major economies is highlighted. This responsiveness is attributed to the high number of short-term mortgages and the rigidity in wage increases. These factors should collectively boost real incomes, as households benefit from lower interest payments on mortgages and stable wage growth. As a result, any interest rate cuts by the Bank of England could stimulate economic activity more effectively in the UK. This increased economic activity provides an additional impetus for the pound, as it supports economic growth and enhances the currency’s value.

Analysts suggest that sustained interest in carry trade transactions could support the pound. Carry trade transactions involve borrowing in a low-interest-rate currency and investing in a higher-interest-rate currency. If the Bank of England is cautious in cutting interest rates, the pound could become a favorable currency for carry trades. These transactions could become more popular, as investors seek to benefit from the interest rate differentials. The increased demand for the pound in carry trades would support its value, providing additional strength to the currency.

Additionally, there is potential for unhedged capital flows into the UK stock market. Investors may find the relatively low prices in the global market attractive, leading to increased investments in UK stocks. These capital flows, particularly if they are unhedged, can support the pound by increasing demand for the currency. The attractiveness of the UK stock market, combined with favorable economic conditions, can draw significant investment, further supporting the pound’s value.

While analysts maintain positive long-term forecasts for the pound, the bank acknowledges potential negative impacts from rising political risks in the US and global geopolitical uncertainties. These factors could introduce volatility and affect the pound’s performance in the second half of 2024. Political risks in the US, such as changes in administration or policy shifts, can impact global markets.

Additionally, geopolitical uncertainties, such as conflicts or trade tensions, can influence investor sentiment and market stability. These factors could offset some of the positive elements from the UK, keeping the GBP/USD exchange rate closer to 1.25 by the end of the year. However, in 2025, the EUR/GBP exchange rate is expected to remain under pressure, while the GBP/USD might benefit from a broad decline in the value of the US dollar. The overall long-term outlook for the pound remains positive, despite potential short-term challenges.

gbpusd analysis, forex trading
GBP/USD daily chart, MetaTrader, 28.05.2024



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