Forming positions in the GBP/USD and EUR/GBP based on the release of data on GDP in Britain

The British pound fell for the first time since August 2017 below 1.29 against the US dollar and reached a 6-month low against the euro, which indicates that there are serious internal problems. They are of a political nature. The statement of the Minister of Trade of Britain Lee Fox that the probability of leaving the EU without a deal is 60% caused a serious blow to the positions of the GBP/USD bulls. It corresponds strikingly to the words of Mark Carney about the uncomfortably high chances of a divorce from the European Union without concluding an agreement. Median forecast of Reuters experts suggests that with this outcome, sterling is able to collapse to $ 1.2.

However, unlike the Ministry of Trade, experts surveyed by a popular publication see only a 25% chance of a deal between London and Brussels until March 2019. This is slightly higher than in July (20%), however, it is still not a basic scenario. Hence, moderately pessimistic forecasts for the GBP/USD. Experts see the pair at the levels of 1.31 and 1.34 in one and six months. By the end of July 2019, it could even grow to 1.38 on expectations of a tightening of the monetary policy by the Bank of England. With this issue, not everything is as simple as it might seem at first glance.

In less than ten days, the BoE raised the repo rate from 0.5% to 0.75%, and the futures market begins to shape the probability of its decline by March 2019, obviously fearing the consequences of the tough Brexit. Against the backdrop of rising pound volatility, investors are actively hedging the risks of its further decline against major world currencies, which is reflected in the narrowing of the differential of the reversal risks (the difference in premiums between call and put options) for 1-month and 8-month contracts to the lowest levels since January.

Dynamics of the risk reversal differential for the pound

Source: Bloomberg. 

  Am I the only one who thinks there is too much negative around the sterling? First, an agreement can be concluded at any time. Even at the last moment. Official London is well aware that it risks facing an outflow of capital and accelerating inflation to 3% or higher against the devaluation of the pound. Brussels is not at all crazy about the idea of ​​breaking ties with a long-standing partner, which already affects the slowdown in the euro area's GDP. Second, it is not the appearance of Brexit (hard or soft) that is important, but how the economy of the Foggy Albion adapts to it. In this regard, a week full of important events in the economic calendar of Britain by August 17 is represented as litmus paper for the GBP/USD and EUR/GBP. However, even before it starts, sterling will have to pass a test release of data on GDP for the second quarter.

Forecasts suggest aceleration of the indicator from 0.2% to 0.4% q / q and from 1.2% to 1.3% y / y. They are based on the Bank of England's hopes for economic recovery in April-June after a weak start in 2018. The ECB thought the same about the euro area's GDP. In practice, it turned out differently, and if history repeats itself with the economy of the Foggy Albion, the pound risks plunging below $ 1.28. On the contrary, the positive will allow it to find the ground under its feet.

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Price chart of GBPUSD in real time mode

Pound is ready to compromise

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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