GBP/USD is going up despite the growing risks of messy Brexit

The poor British pound suffered from the flash crash, having dropped to the lowest level to the US dollar since April 2017; however it has quickly covered the losses. The risk reversal of the GBP/USD pair is at the highest level for the year. It is despite the market confidence that the UK parliament will reject the draft divorce-deal with the EU, offered by Theresa May, at the vote on January 14. Investors are optimistic about the pound future, and the bears can only shrug their shoulders. Commerzbank warns its clients about false hopes. The positive outcome of the vote on the UK leaving the European Union hasn’t become more likely. One shouldn’t take hasty decisions and buy the sterling due to the belief in a soft Brexit.

Dynamics of GBP/USD risk reversals

Source: Bloomberg

I must admit that the GBP/USD pair has grown mostly because of the US dollar. The greenback was actively being sold due to a lower likelihood that the Fed would continue its monetary restrictions cycle; and so, the pair has tested figure 28 base. Jerome Powell noted that a slow inflation growth would allow the central bank to be flexible; the FOMC members were speaking about patience in the minutes if its December meeting; and even the former Fed hawks were calling for a pause.

Boston Fed chief Eric Rosengren noted that in the uncertain situation it made some sense to wait and see. According to him, there are two major scenarios. The first one suggests a potential recession that is more and more often being discussed by the markets. The second one, Rosengren himself believes in, suggests the GDP growth at a rate higher than a potential level.

Chicago Fed President Charles Evans still believes in more federal funds rate hikes, but is not willing to resort to it right now. As the US inflation rate is not going to exceed 2%, the Federal Reserve should pause its monetary restrictions cycle. St. Louis Fed President James Bullard warned that more rate hikes could cause a recession. It is not surprising that these hawkish speeches got the derivatives market to reduce the probability of more Fed rate hikes in 2019 down to 9%, from 21%.

Therefore, the main reason for the GBP/USD rally has become the USD weakness. Besides, Reuters FX strategists are still optimistic about the middle- and long-term prospects of the pair. According to the consensus forecast of 66 experts, the sterling should go down to $1.27 in a month; but then, it should go on with a rise up to $1.3 at the time of Brexit; GBP will be up to $1.32 by mid-year, and the pound price will be as high as $1.38 at the end of the year. Economists, surveyed by Bloomberg, believe that the Bank of England should raise its Bank rate already in May, provided the things go according to the positive scenario.

In my opinion, a pleasant surprise from the British Parliament will encourage the GBP/USD bulls to storm the resistances at 1.2805 and at 1.285. Nevertheless, you shouldn’t take your decisions too early and buy the pound right away, as the political environment still remains uncertain.

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Price chart of GBPUSD in real time mode

Pound is going ahead

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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