Pound celebrates an early victory. Forecast as of 22.12.2022

Pound is the name for a unit of currency. It is used in some countries today and previously was used in many others. Forex traders have been long focused on the divergence in monetary policy. Due to the gap between interest rates of central banks, the US dollar was rising in 2022. There will be new trends in 2023. Let us discuss the Forex outlook and make up trading plans for the EURGBP and GBPJPY.

Pound fundamental forecast for six months

In 2022, the BoE was tightening its monetary policy slower than the Fed. In 2023, it could be lagging behind the ECB or even the Bank of Japan. At the last meeting, Andrew Bailey said that inflation in the UK had peaked, which forced the derivatives market to lower the expected rate ceiling. On the contrary, Christine Lagarde was very eloquent, arguing that the story didn't end with December's +50 basis points. Divergence in monetary policy can encourage the EURGBP bulls.

Surely, to claim that inflation has hit a ceiling after it barely dropped from 11.1% to 10.7% in November was too early. Furthermore, the services prices, the indicator that is followed by central banks, are at the highest levels in 20 years, and UK employment is strong.

Dynamics of services inflationDynamics of services inflation

The ECB deposit rate will reach 3.5% in 2023, according to Pantheon Economics, and investors agree in general. The euro-area economy looks better than expected at the beginning of autumn. Yes, it is most likely already in recession, but the recession does not look long and deep. This gives the ECB more freedom in fighting inflation, promising a EURGBP rally in the future. Commerzbank and TD Securities expect the pair to rise to 0.9 by June, RBC — by December, which is higher than Bloomberg's consensus forecast of 0.89 at the end of 2023.

A certain risk for the strategy of buying the euro against sterling is associated with excessively high speculative euro longs, which have been growing rather fast lately. This circumstance increases the likelihood of EURGBP corrections down, which should be used to open long positions at favourable prices.

Dynamics of euro speculative positions

Monetary policy divergence could also encourage the GBPJPY bears. Despite the Bank of Japan's intention to do everything possible to convince investors of maintaining an ultra-easy monetary policy, markets believe that the BoJ should start monetary tightening. After expanding the yield target range, Goldman Sachs predicts a BoJ rate hike in 2023. Expectations of monetary normalization should make the yen a top favorite next year.

Other central banks will also continue monetary tightening cycles, so the global risk appetite will be under pressure. Furthermore, the UK has to fund the foreign trade deficit, which Investec predicts will hit a record high this year. The previous high of £109.7 billion took place in 2016.

Trading plan for EURGBP and GBPJPY for six months

In 2023, due to the divergence in monetary policy, it will be relevant to buy the EURGBP and sell the GBPJPY on corrections. The targets will be 0.898 and 0.904 for the euro-pound and 155.2 and 153.7 for the pound-yen.