Political risks and the lack of strong statistics in Britain will keep the GBP/USD under pressure

The second quarter has become the worst quarter for the British pound since the vote on the membership of the Foggy Albion in the EU. Against the US dollar, the sterling lost more than 6% against the backdrop of regularly arriving disappointing statistics on Britain, the REPO rate being postponed to a later period than initially expected by the market, and the resuscitation of political risks. According to Manulife Asset Management, Brexit is a more important driver of the GBP/USD quotes change than the monetary restriction by the BoE. Rabobank notes that while there is a huge lack of clarity in the government's plans, the pound will continue to weaken. The bank sees it at the level of $1.28 by the end of the year.

Quarterly dynamics of the pound

Source: Reuters. 

10 months before Brexit, the statement of the chief negotiator on part of the EU Michel Barnier about the large and serious divergence in the positions of London and Brussels makes investors stay away from sterling. At the same time, MUFG believes that in the near future the government will clarify its own plans, which will become a catalyst for the GBP/USD growth in the direction of 1.4. The bank believes that most of the negative sentiment is already priced in the pound quotes, which is reflected in the form of a fall in its volatility. In general, MUFG looks like a black sheep, because most speculators sell sterling. In the futures market, net positions reached the red zone for the first time since November 2017. At the same time, in the spring, the net long positions were in the area of ​​three-year highs.

Dynamics of speculative positions in the pound

Source: Reuters.

Obviously, hedge funds and asset managers were too optimistic about the prospects for the sterling, and their disappointment resulted in large-scale sales.

The pill was sweetened by the final reading on the GDP of the Foggy Albion for the first quarter. The economy grew by 0.2% q / q, which allowed the Bank of England to save face and threw chances of the repo rate raise in August from 50% a week earlier to more than 60%. The BoE previously claimed that the initial assessment will definitely increase. In general, the desire of the central bank to support the pound with hawkish rhetoric looks logical: its devaluation increases the risk of CPI returning to 3%. The regulator will have to raise the rate to fight inflation, which is similar in conditions of sluggish GDP dynamics.

In my opinion, without a clear scenario for Brexit from the British government and the improvement of macroeconomic statistics for the Foggy Albion, the sterling will continue to be under pressure. In this regard, releases of data on business activity in Britain in June can give a clue about the health of the economy. Particular attention should be paid to the PMI in the services sector. Positions of the GBP/USD bulls might improve due to some weakening of the US dollar. The White House begins to hinder the Fed in the normalization of monetary policy, and if the pigeon rhetoric of the FOMC is reflected in the minutes of the last meeting of the Committee, the greenback may weaken against competitors from the G10. Thus, a breakout of the resistances at 1.323 at 1.329 will increase the risk of development of correction to the downtrend.

Pound got caught in an avalanche

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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