Pound price forecast 3 March 2021

2021-03-03

Pound tames the tiger. Forecast as of 03.03.2021Dmitri Demidenko

Massive monetary stimulus from central banks has contributed to the cages’ opening and the release of the tigers - inflation and bond yields. Taming them can be more difficult than expected. How will this turn out for [GBPUSD][1]? Let us discuss the Forex outlook and make up a trading plan.

Weekly pound fundamental forecast

Everyone chooses their own path. Unlike central banks, which are worried about the rapid rally in bond yields and are determined to combat this alleged dysfunction of financial markets, the Bank of England’s views are close to that of the Fed. Deputy Governor, Dave Ramsden, said Britain’s debt obligations are moving in an orderly fashion and that BoE has a high bar to cut its monetary stimulus. The BoE chief economist, Andy Haldane, believes that inflation acts like a tiger once released from its cage. It will not be as easy to tame afterward. The hawkish stance allows the pound to recover from massive sales at the end of winter.

Dynamics of British bond yields

Source: Bloomberg.

The [GBPUSD][1] prices quickly reached the target of 1.42 set [in the previous article][2]. However, the rise in the global debt market rates and the associated strengthening of the US dollar was a big shock for the sterling buyers. The analyzed pair sank below 1.4 and barely held above the bottom of figure 39. Only the stabilization of the Treasuries allowed the pound to recover.

At first glance, the fact that the Bank of England is not intimidated by the growth in yields on local bonds looks strange. The UK economy has suffered the most significant losses caused by the pandemic among European countries, including the loss of human capital assets. The £300bn fiscal stimulus significantly worsens the state of public finances: the size of the budget deficit will exceed £360bn for the first time in the post-war period, and the debt will exceed GDP, which has not happened since the 1960s. At the same time, according to Treasury estimates, if the interest rate rises from 0.1% to 1.1% and pushes up bond yields, this will increase the cost of servicing the government debt by £25 billion a year. BoE believes this figure is exaggerated. In fact, it will be about £10 billion a year.

Dynamics of the UK budget deficit

Source: Bloomberg.

Thus, it is understandable why the Bank of England prefers to adhere to the Fed’s views. BoE is less concerned about the growth of bond yields than the Treasury. The latter is even forced to think about raising taxes to put public finances in order. In my opinion, the fears of Rishi Sunak and his colleagues are exaggerated. According to Bloomberg estimates, even if bond yields continue to rise, this will mean that debt expenses will not be 1%, as previously assumed, but 1.2% of GDP on average over the next five years. The average since 2000 has been 1.7%.

Weekly [GBPUSD][1] trading plan

In my opinion, the stabilization of the situation in the US Treasury bond market will contribute to the recovery of the dollar’s opponents. The pound will be one of the first in this list, taking into account the UK’s extensive vaccination campaign, the Treasury’s willingness to expand fiscal stimulus, and the Bank of England’s moderately hawkish stance. A breakout of the resistance at the level of 1.4 will allow the [GBPUSD][1] to start rising, and one could enter long trades. The main risk factor for this strategy is the US debt market’s reaction to the publication of strong statistics on US PMI and employment data. Treasury yields growth can discourage the pound bulls.

Price chart of GBPUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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