Problems in the Brexit negotiations, growing risks of a vote of no confidence in Teresa May and manifestations do not allow the sterling to recover

The cocktail of deadlocked Brexit talks and domestic political instability leaves traders little reason to look at the British pound with optimism. According to Bloomberg expert polls, if no agreement between London and Brussels is reached, the sterling will pay for this with about 8% against the US dollar. On the contrary, the deal will boost its quotes by 6%. However, a compromise with the EU is not the only problem of the GBP/USD bulls.

Judging by the proposals coming from Brussels, the European Union is sympathetic. The announcement of the possibility of a broad customs union, which will include not only Northern Ireland, but also the entire United Kingdom, allowed the pound to raise its head for a short time. The problem is that even if Teresa May agrees, she will not be supported within the Conservative Party. Moreover, there are rumors in the market that the number of dissatisfied with the policies of the Prime Minister has already exceeded the minimum required for a vote of no confidence. Nomura estimates that if this happens, the GBP/USD lose 1-2%.

The political risks for the sterling do not end here: numerous demonstrations about the need for another referendum are all held over the country. Many understood the fallacy of their decision: before the vote, Britain’s GDP grew by 1.7%, after that it slowed to 1.2%. At the same time, the economies of the main competitors represented by the eurozone and the USA gained momentum. Is it worth being surprised by a 13% decline of the GBP/USD from the middle of 2016 given such a background?

GDP dynamics of the United States, the eurozone and Britain

Source: Financial Times. 

If someone is surprised that it is the policy that determines the fate of the pound, and not, say, the main driver of exchange rate formation on Forex - the actions of the central bank, then they shouldn't be. The rate of normalization of the monetary policy of the BoE depends on how relations with the EU develop. If the sterling, because of no agreement between London and Brussels, declines drastically, this will easily bring British inflation back to around 3% and will force the BoE to raise the repo rate. On the contrary, a rally of the GBP/USD may shift the indicator below the target, which will allow the regulator to sit back.

Predictions of the impact of the devaluation of the pound on inflation

Source: Bloomberg.

One should not forget that in each pair there are always two currencies, and along with the swampy political landscape of the pound, the fall of the GBP/USD to the minimum mark since the beginning of September was caused by the strong health of the US dollar. While the risks of a slowdown in the US economy due to the fading of fiscal stimulus and trade wars are illusory, the greenback feels confident. Especially since the Fed does not respond to the bitter criticism of Donald Trump and continues its course with an increase in the federal funds rate. In this regard, the release of data on US GDP for the third quarter should be the catalyst for the further movement of the pair. Strong statistics will instill confidence in the bright future of the American economy and allow the bears to continue the peak in the direction of 1.275. On the contrary, disappointing data will increase the risk of the pound returning to $ 1.3.

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Price chart of GBPUSD in real time mode

Pound is torn by inner controversies

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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