Lack of liquidity in the UK financial market sets the GBP/USD bulls back

No matter how many times Sisyphus tried to push a large rock up on a steep hill, he only found it rolling back on nearing the top. Theresa May seems to be doing something similar, trying to obtain preferences from the EU. She can travel from London to Brussels infinitely long, but the result will be the same as that of the Ancient Greek king. No result a tall. Investors are getting more confident in this and exit the pound longs, closing its price in the red zone over three consecutive weeks.

While the Forex volatility is going down to the lowest levels since 2014, an increase in the pound volatility makes it an outsider. In the world, where the new money are invested in holding the old positions, rather than in giving loans to expand the production, the quantity (liquidity) becomes more important than quality (price). As long as the entire world is living in the situation of the central banks’ easy monetary policy, the lack of liquidity becomes a disaster for the GBP. The GBPUSD risk reversals are down to the record low since November, the United Kingdom 10-year bond yield is at the eight-month low. In this situation, it gets really hard to oppose. Only another currency could help. The GBPUSD surge at the end of the week, ending February 15, resulted form the US dollar weakness amid the easing of the US-China trade battle.

Dynamics of FX volatility

Source: Financial Times

Dynamics of GBP/USD risk reversal

Source: Bloomberg

It is hard to be optimistic about the asset that could be 25% down in case of messy Brexit. This scenario is suggested by Bloomberg experts. They also forecast a 30% drop in housing prices and a recession. On the other hand, if you are a UK hedge fund and bet on the pond sell, you may be charged with insufficient patriotism. The UK parliament seems to be in a similar state. It is unwilling to reach a compromise with Theresa May. Furthermore, it has rejected the amendment, allowing to extend the Article 50 of the Treaty of Lisbon. A new vote is scheduled for February 27, a month before the official Brexit date. This fact may get the policy-makers more loyal to the ideas of the Prime Minister.

When the policy is the key factor, the economy moves to the background. The sterling was going down amid the weak GDP data and industrial production and ignored the strong retail sales data. It actively being sold on the negative news, which looks quite reasonable as the unfavorable political environment remains. In this context, there is some point in considering rival currencies. The dovish rhetoric of the FOMC meeting’s minutes in January may well encourage the GBPUSD bulls to storm the resistances at 1.2995 and 1.3025. Otherwise, if the rumours about the ECB resuming the LTRO are exaggerated and (or) the euro-area PMI is not that bad as the Bloomberg experts expect, the EURGBP buyers may be back to the game.

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Price chart of GBPUSD in real time mode

Pound – outsider currency

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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