GBP/USD rallies in January and in February look similar 

You can’t step twice into the same river, but you can step twice on the same rake.  The GBP is again surrounded by euphoria about a potential extension of Article 50 of the Treaty of Lisbon. The GBP/USD rate is up at the 4-week highs on the information that Theresa May is going to offer the following idea to the parliament; like, if you don’t vote for my plan, we shall revise Yvette Cooper’s amendment. The UK policy-makers have already rejected it once; but, as March 29, the official Brexit date, approaches they are likely to be more cooperative.

The sterling is still swinging to the politics. Having taken an advantage of the U.S. dollar weakness, it climbed above figure 30 base to the dollar, followed by the drop below it on the news about Brussels unwillingness to adopt any changes in the Brexit draft agreement. Up is it again! And how high! The GBP/USD rally in February looks just the same as it was in January; the same euphoria about extension of the Brexit date, the same growth of the pond bullish outlooks, corresponding to the risk reversals, the same optimism about the GBP prosperous future. According to MUFG, if the Parliament adopts Cooper’s amendment, the GBP/USD should surge up to 1.33; if it is rejected; the pound should drop as deep as to $1.284. It is a good reason to trade on news. Even if the news is political, rather than economic.

Forecasts for GBP response to Parliament decision


Source: Bloomberg

Only those, who have already suffered from the rake touch, warn that article 50 extension will extend the uncertainty, rather than ease it. The UK economy was expanding in Q4 at the slowest pace over the past 6 years, and the UK PMI is still going down, along with a decline in the inflation rate. It is hard to drive it up only on the strong labour market alone; they also need an improvement in demand, both domestic and foreign. Therefore, the GBP/USD rally has a limited potential. Furthermore, banks are revising down the bullish forecasts, suggested earlier for the pound. In particular, ABN Amro expects the GBP/USD to be at 1.35 in late 2019, compared to the previous estimate of 1.45.

Median pound forecast by Bloomberg experts

Source: Bloomberg

I’d like to stress another common feature of the GBP/USD rally in January and February; it is the weak dollar. Jerome Powell’s comments about the Fed’s patience, along with the markets’ confidence in the end of the US-China trade battle, encouraged traders to sell the dollar. The could sell dollar faster if, due to bad weather, weakening effect of the fiscal stimulus, low foreign demand and the dollar revaluing, more disappointing economic data are reported in the U.S.. The US GDP data for the fourth quarter should be especially focused on. The forecast of +2.5% Q-o-Q seems too optimistic to me.

The GBP/USD rally might go on in the middle run, provided that the political environment in the UK improves, trade wars end and the U.S. economy growth declines. Therefore, I’m still keeping to my January forecast, suggesting the GBP/USD growth towards 1.35-1.36 over the next few months.

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Price chart of GBPUSD in real time mode

Pound steps on the same rake

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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