GBP/USD drop is limited as the UK has a plan B

The situation around the UK seems to be improving, but investors are ignoring any positive. It is hard to drop out on the Bloomberg experts’ opinion, having been imposed for months, that messy Brexit should result in GBP/USD crash to 1.15 – 1.2. If they agree on the EU deal, the pair will be up to 1.35 -1.4. The first scenario may allegedly lead to political chaos, breaking of economic ties and recession. The second one may result in the UK allegiance to the EU. After all, the UK, unlike Italy, still has a plan B.

While the supporters of soft Brexit, including the Bank of England, are frightening the policy-makers with the economic recession and increased turmoil in the financial markets, their opponents are charging Theresa May with telling lies. According to them, the Prime Minister is concealing the fact that the proposed deal with the EU will make the UK stay in a customs union forever. The European Union will be the lord and Great Britain - its vassal. Earlier, May was insisting that zero deal is better than a bad deal; but it turns out to be different.

In fact, if on December 11 the British Parliament rejects the deal, agreed with the EU, the pound may not drop $1.2 or deeper. London can hold a second EU referendum (according to bookmakers, the chances are up to 40%), get the access to the European markets by means of Norway Plus plan, or, the UK can unilaterally cancel Brexit Article 50.

Any scenario will result in the market uncertainty. Taking into account that the pound sterling fundamental undervaluation, GBP/USD is likely to go up.

The probability of a second EU referendum

  

Source: Bloomberg

Currently, the derivative market doesn’t suggest the necessity to raise the Bank rate by 25 bps earlier than March, 2020. But the Bank of England may be more active due to easing of political risks, lower pound volatility and positive macroeconomic data, including a higher UK PMI index. According to Mark Carney’s comments, the BoE is willing to raise the interest rate for three times within the next three years.

Probabilities for BoE rate hikes

Source: Bloomberg

Therefore, the GBP is not that hopeless as soft Brexit supporters try to present. BoE, is obviously reluctant to face another pound crash, resulted from the higher inflation growth risks. I don’t think it will occur. At worst, the GBP/USD pair will be down to 1.22-1.24; but talks about a second referendum, Norway Plus scenario or the revoking of Article 50 will encourage investors to buy it at cheap prices.

The GBPUSD bullish trend will resume even sooner if the UK parliament supports Theresa May on December 11. Improved political environment, along with moderately positive macroeconomic statistics will encourage the Bank of England to go ahead. In addition, the U.S. economy growth is getting more likely to slow down, like the Fed monetary normalization. It will encourage traders to close dollar longs, pushing the GBPUSD up towards 1.35.


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Price chart of GBPUSD in real time mode

Pound is not bluffed and scared

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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