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The outlook for GBP/USD: Anticipating rate cuts and economic shifts

gbpusd analysis, forex trading

The trajectory of the British pound is closely aligned with the market's anticipations regarding future adjustments in interest rates across several major economies, including the United Kingdom, the Eurozone, and the United States. Investors are particularly focused on the timeline of these anticipated rate cuts. There is a widespread expectation that the European Central Bank will initiate these cuts as early as June.

This is followed by a projection that the Federal Reserve in the United States will make its move in July, with the Bank of England expected to follow suit in August. Concurrently, the GBP/USD currency pair has been experiencing a resurgence, with financial experts at NatWest projecting a significant upswing, potentially surpassing the 1.30 mark by the middle of 2024.

Despite the UK grappling with a substantial and enduring deficit in its current account, the general outlook for the British pound is largely influenced by an established equilibrium. This equilibrium is between the nation's high nominal yields and the comparatively subdued prospects for its economic growth. This interesting dynamic of balancing high yield against modest growth expectations is a key factor shaping the currency's valuation and performance in the global market.

Markets have seemingly factored in the gravest scenario of a recession already. However, the recent publication of the Purchasing Managers' Index (PMI) for the UK's manufacturing sector brought a glimmer of optimism. The data revealed a noteworthy increase to 50.3 points in March, climbing from 47.5 points in February, surpassing market expectations which had anticipated a rise to only 49.9 points.

This positive development in manufacturing data somewhat alleviates the immediate pressure for the Bank of England to cut interest rates. The market’s current estimation suggests a significant 85% likelihood of such a rate cut occurring on August 1st.

The financial markets have undergone a substantial shift in their expectations regarding interest rate cuts among the leading central banks. Just a few weeks ago, there was a common belief that the ECB, Fed, and Bank of England would all initiate their rate cuts as early as June, almost in a coordinated manner. However, this view has now evolved, and the anticipation of simultaneous rate cuts is primarily confined to the European Central Bank. Yet, even this expectation carries a degree of uncertainty, especially in light of the upcoming decision from the ECB, which could potentially alter the landscape once again.

Experts at NatWest have made some noteworthy observations regarding the UK's financial climate. They note that for the first time in several years, the UK market does not exhibit an excessive risk premium, which would necessitate a corrective action in the upcoming quarters. NatWest anticipates that the UK will feature among the highest yields within the Group of Ten (G10) in the forthcoming nine months. They also predict that the first interest rate cut by the Bank of England could be expected as early as August, indicating a significant turn in the UK’s monetary policy.

Turning to the Federal Reserve, NatWest economists are forecasting a rather profound easing cycle, implying significant rate cuts. On the other hand, the prospects for economic growth in the UK appear less promising, with the economists projecting a relatively weaker expansion. However, they suggest that if the UK continues on a positive economic trajectory, the GBP/USD exchange rate might rebound to its 2023 peak levels, reaching around 1.30.

For a considerable part of the previous year, the United States economy demonstrated an 'exceptional' performance compared to other global economies. This exceptionalism benefited the US dollar, which gained strength on several fronts. The dollar's robustness was backed by solid consumer fundamentals, the United States' status as a net exporter of energy, and a rather expansive fiscal policy.

The economists from NatWest highlight that the declining trend in inflation is likely to empower the Federal Reserve to embark on interest rate cuts possibly as soon as June. Should these cuts be significant, they anticipate a notable surge in the GBP/USD exchange rate, potentially exceeding 1.28 and aiming towards 1.30.

gbpusd analysis, forex trading
GBP/USD daily chart, MetaTrader, 08.04.2024



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