Open GBP/USD positions according to the report on the US labour market

Following a fast rally in late February that drew the pond to the G10 leader, the sterling took a break waiting for the political news. Investors are getting more confident that the UK will escape from messy Brexit. Despite the weakness of the UK economy, they bet on the GBP/USD rise. A mistake may cost a lot. According to the median forecast of more than 60 Reuters experts, if the agreement with the EU is not reached, the pound may go 9% down to $1.2. However, the experts estimated he probability of this scenario at 15%.

Large banks estimate the chance for messy Brexit ta 9%. 16 Bloomberg respondents believe that the UK parliament will either agree with the Brexit deal plan, offered by Theresa May (it is 37% likely), or extend article 50 of the Treaty of Lisbon (54%), which will allow to gain time. In the first case, the sterling will go up to $1.38, in the second case – up to $1.33. Reuters experts are also quite optimistic. They expect the GBP/USD to be at 1.32, 1.35 and 1.39 in late march, in 6 and 12 months, accordingly. It’s just a little while now; on March 12, the Parliament should vote on the Prime Minister’s offer. One of the possible outcomes is the second referendum on the UK membership in the EU.

Possible Brexit scenarios

Source: Bloomberg.

Sterling fans do really hope that the UK won’t leave the EU. If so, according to them, GBP/USD has the chances to go up to the level where the pair used to be trading before the referendum. However, I don’t think it is real. First, since summer 2016, the US dollar, due to the Fed’ s aggressive monetary restriction, has become much stronger. Second, the UK economy has become much weaker, and is likely to be further weakening. According to OECD, the UK GDP rate, even in case of soft Brexit, won’t expand by more than 0.8% in 2019 and by 0.9% in 2020. No Brexit deal will push the UK economy down into a recession.

Such projections are evident form the economic date as well. Despite the Services PMI growth up to 4-months high, Markit suggests that the February change in the composite PMI corresponds to the GDP growth of 0.1% Q-o-Q in the first quarter. They are especially worried about the growth in the number of layoffs, which hits the important pound advantage, labour market.

In my opinion, the sterling will hardly move through March 12, the official vote date; and so, it makes some sense to bet on its rivals. In particular, enter the trades for EUR/GBP and GBP/USD according to the outcomes of the ECB meeting and the report on the US labour market. If the US economy looks weaker, like the lower growth of employment and wages than Bloomberg experts expect (+0.3% M-o-M), the pound bulls will go ahead and storm the resistances at 1.3215 and 1.3265.

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Price chart of GBPUSD in real time mode

Pound is going with the flow

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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