GBP/USD future trend will depend on UK lawmakers

The UK parliament set the GBP/USD bulls back, having rejected Theresa May’s Brexit deal by 391 votes to 242. The pair has dropped down by almost three figures on the concerns about messy Brexit. According to Invesco, with this scenario, the sterling may slide down to $1.15. After all, based on cheap put options, the derivatives market believes that everything will be fine in the end. On Wednesday, the UK lawmakers should vote on whether the UK should leave the EU without a deal on 29 March. If everything goes well, they are to discuss an extension to article 50, on Thursday. An unpleasant surprise from the UK parliament will knock the pound out. The end is soon So, it is getting more and more interesting to watch the situation in the UK.

Political uncertainty presses down the UK economy. Despite the strong labor and increasing wages, consumers are not willing to spend their money, being concerned about messy Brexit and a recession. As a resullt, the economic expansion is lowing down. Even if the UK GDP was growing at a rate of 0.5% M-o-M in January, but it is rather a recovery after the 0.4% drawdown in December. As an outcome of the three-month period, the indicator increased by 0.2% Q-o-Q, predicted by Bloomberg experts. The Markit PMI data suggest that the economy growth will slow down to o.1% Q-o-Q in the first quarter.

Dynamics of UK GDP 

Source: Bloomberg.

Despite the discouraging data of the recent days, the pond seems to be steady due to investors’ hope that messy Brexit will be avoided. It is supported by the fact that the sterling is undervalued, compared to the price of 2016, and the BoE announces that it needs political clarity to raise its interest rate. Nonetheless, it can hardly be suggested that an extension to article 50 of the EU Treaty will allow the GBP/USD bulls to draw the rate back to 1.5. First, the US dollar has considerably risen over the past few years. Second, the UK economy is slowing down. And, finally, the BoE will hardly force things and tighten its monetary policy soon.

But still, based on the assumption that the UK Parliament will delay the official Brexit date from March 29, the GBP/USD pair may well meet the January forecast, suggesting the middle-term target at 1.35-1.36. Along with improved political environment, the US dollar weakening is needed to bring the forecast to reality. The derivatives market doesn’t believe that the Fed will go on normalizing its monetary policy; and, following the discouraging US economic data, it increases the chance of the Fed’s rate cut in 2019.

For the short-term investing, it makes some sense to expect the decisions of the UL lawmakers. If nobody expects negative, the Murphy law reads, it may happen at the worst time.

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Price chart of GBPUSD in real time mode

Pound places its trust on UK Parliament

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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