Will the GBP Rally after Heavyweight Investors Arrive?
The GBP/USD currency pair is trading around the 1.34436 level as at the close of trade on Friday, 1 December 2017. At the start of the year, the cable traded at 1.2349 and appreciated by $0.1096 to its current level. At the current level, sterling is at a 2-month high against the greenback, driven in part by weakness in the USD. If investors’ expectations prove correct, Brexit secretary David Davis and his EU counterpart Michel Bernard Barnier will reach a deal before the end of the month. Currency traders are hopeful that the framework of a negotiated Brexit settlement will be agreed upon, including details of the proposed Irish border, the state of pension payments, and the rights of EU nationals in the UK.
Big Meeting Scheduled for Mid-December
On Thursday, 14 December, the EC (European Council) will be meeting for UK/EU negotiations. Since the June 23, 2016 referendum the GBP/USD pair is down approximately 10%, and the GBP/EUR pair is down approximately 13%. Over the past month however, the GBP/EUR pair is up 2%. Investors are loath to suggest that the GBP/USD pair is on the road to recovery, however short-term optimism trumps long-term pessimism. The status of ongoing Brexit negotiations will provide insights into investor sentiment. Currency trading experts anticipate that gridlock between both parties could result in a drop towards the 1.30 support level for the GBP/USD pair.
What Will Prime Minister May Offer European Regulators in Brussels?
It remains to be seen what package deal the British Prime Minister is prepared to offer the Europeans when she meets to discuss a Brexit package deal with Jean-Claude Juncker. As it stands, strong single digit gains have been made against EUR and USD in recent days. Consider that at the start of 2017, the cable plunged beneath the key 1.20 level, making its current levels more promising. Incremental and steady gains have followed, buoying expectations that sterling is on the road to recovery. Friday’s level of 1.3549 was its best since September, and if bullish sentiment continues, the vaunted 1.40 level is not out of the question. The last time sterling experienced such bullishness against the greenback was Q1 and Q2, 2016 when it topped out around 1.48 before plunging spectacularly to its nadir in double-quick time.
There are certainly bulls in betwixt the bears, with Credit Agricole forecasting a rate of 1.40 to the greenback. Various currency strategists have indicated that their anxiety over the future of GBP could lessen if things go well. For sterling to perform bullishly against currencies like CHF, EUR, JPY and others, the fundamentals of the UK economy will need to improve. As it stands, UK inflation is around 3%, according to the Office for National Statistics (ONS). This rate remained in place since September 2017. The inflation rate has been climbing since September when it was measured at 2.9%. Personal disposable incomes are being squeezed as inflation growth outpaces real wage growth.
Short-Term Optimism for Sterling Bulls
According to data from the CFTC (Commodity Futures Trading Commission), there are more bullish expectations for sterling then bearish expectations. However, bullish sentiment quickly evaporates if Brexit talks go into freefall. Fortunately, much of the negativity about a Brexit has already been priced into the markets. Markets may be returning something to sterling, but it’s too soon to tell. Growth in the Eurozone is fuelling a robust recovery towards quantitative tightening, while the UK seems to be moving in the opposite direction.
Is the UK economy recovering? Do you see any signs that companies are investing more in homegrown activity? What are the job prospects like in your locale?
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for spreadbettingreview.co.uk.