Depending on the deal or no deal between the UK and the EU, the GBP/USD may soar to 1.35 or fall to 1.2

Caution is the parent of safety. Despite the fact that 56 Reuters experts estimate the chances of no deal between the UK and the EU by March 2019 as 1 against 4, investors seriously consider both scenarios. This is evidenced by the reaction of the pound to the message of The Times that Teresa May managed to agree on the access of the UK companies to the financial services market of the European Union. If the good news had already been priced in the quotations of the sterling, it would hardly have been marked by heightened sensitivity to positive data. However, perhaps the reaction was too impulsive.

A single deal does not guarantee a general agreement. The Brexit secretary may assure that it will be signed by November 21, but the unresolved issue of the Irish border raises doubts in the words of the official. According to a median estimate by Reuters experts, in case of no deal, the GBP/USD will drop to 1.2, but, on the contrary, a deal will raise the quotes of the pair to 1.35. With such a gap, it is not surprising that news of a political nature provoke a strong reaction of the pound. The experts may give the forecasts at $ 1.29, $ 1.34 and $ 1.38 in 1, 6 and 12 months, there are few people wanting to jump the gun on the market.

The swampy political landscape paints a mixed picture in macroeconomic statistics. The potential acceleration of GDP to 0.6% q / q in the third quarter and the rapid growth of average wages against the background of the lowest unemployment rate in several decades contrasted with the fall in business activity in the manufacturing sector to the bottom since the referendum on Britain's membership in the EU. Markit respondents are concerned not only about Brexit, but also about the potential slowdown in global demand under the influence of trade wars.

Dynamics of business activity in the manufacturing sector of Britain

Source: Bloomberg.

Good news of a political nature, it would seem, should ease the task of the Bank of England, whose meeting is the key event of the week ending November 2 for the pound. The futures market gradually reduces the chances of the repo rate raise: if at the beginning of the third decade of October, the probability of the May monetary restriction was estimated as fifty-fifty, then by the end of the second month of autumn it fell to 40%.

Dynamics of the likelihood of the repo rate raise

Source: Bloomberg.

In my opinion, Mark Carney will stick to a hawkish rhetoric. The devaluation distances inflation from the target of 2%, so the central bank has to choose between hints of tightening monetary policy and raising the repo rate. The first option seems to be less painful for the economy than the second one. However, words of support are unlikely to allow the GBP/USD to rise significantly higher. The mere fact of having an agreement on financial services makes little difference. Someone in the ranks of the Conservative Party would like to have a deeper cooperation, not the principle of equivalence (the same access as for Japan and the US), someone, on the contrary, dreams of seeing London as the main financial center of the world. The split reinforces political risks, which allows us to think about shorts in the sterling at the rebound from the resistances at $ 1.2975 and $ 1.304.


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Price chart of GBPUSD in real time mode

Pound: love and hate are just one step apart

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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