Has The Crown Already Slipped? What’s GBP’s Status Today?

You’ve joined us as we’re about to get into a super-interesting topic: the current status of the GBP. Is it still a top currency? What do traders make of it? We’ll dig deeper, ask a few pros and then give you a rundown of the most important events for your trading radar this week.

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The Future of the Sterling

The status quo transition deal between the UK and EU is set to expire at the end of 2020. Britain is seeking a free-trade deal with the EU, which it severed ties with on January 31, 2020. But, both sides have so far made little progress. The coronavirus pandemic obviously gets some of the blame. It has complicated matters further in the European continent. The UK has been badly hit, with more than 312K infection cases and 43K deaths, as of June 29, 2020. The economy is poised for a major decline in 2020, with GDP contraction of more than 20% in April. The Organization for Economic Cooperation and Development predicts an 11.5% downturn for the year.

Brexit talks have been relegated to video conferences. Both sides remain deadlocked on critical investment and trade issues. While the UK wants zero tariffs and quotas with the EU, it is determined not to agree to a “level playing field”.

Caught in this tussle is the Great British Pound (GBP), which has suffered some of the most tumultuous years since its inception. Since the June 2016 Brexit referendum, the Pound Sterling has lost 20% of its value against the US Dollar.

According to analysts at Bank of America, the Pound now resembles an emerging market currency — highly unpredictable and volatile. Bank of America analyst, Kamal Sharma recently stated:

“We believe Sterling is in the process of evolving into a currency that resembles the underlying reality of the British economy: small and shrinking with a growing dual deficit problem similar to more liquid (emerging market) currencies.”

But, will the GBP lose its place among the G5 currencies? Here’s a quick look at recent GBP events:

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The GBP Trajectory So Far — A Volatile Currency

The Pound Sterling declined sharply after the 2016 referendum. From trading in the range of $1.48 to $1.55 against the USD, pre-referendum, the GBP crashed to $1.32 by June 30, 2016. Over the next 3 years, the Brexit uncertainty, spurred by political instability in the UK and overall geo-political crises, continued to take its toll. By January 2017, it was trading as low as $1.20.

It plunged below the level of $1.20 on September 3, 2019, when UK Prime Minister Boris Johnson lost a crucial Brexit vote in the UK parliament. This was a level it had not traded since 1985.

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Image Source: https://www.independent.co.uk/news/business/pound-sterling-developing-country-currency-brexit-a9583106.html

Analysts at Goldman Sachs and Monex Europe had predicted in September 2019, that if the UK exits EU without a deal, the Pound would decline a further 7%, taking the GBP/USD to $1.12. Against Euro, it would fall below parity.

Removal of the risks of a hard-Brexit in the near term, easing of trade tensions between the US and China and the widely expected fiscal expansion, together with recovery in global economic data, looked promising for the GBP in early 2020. But 2020 brought in a massive humanitarian crisis in the form of the COVID-19 pandemic.

As the pandemic induced a panic selling spree in the global financial markets from February 2020 onwards, leading to a stock market crash in March, the GBP/USD fell to $1.15 on March 19, 2020.

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Image Source: https://tradingeconomics.com/united-kingdom/currency

The Pound was the hardest hit currency, falling over 10% in value due to the lack of global liquidity and concerns over access to the US Dollar, since early March 2020. The UK has a substantial financial services sector, and US Dollar shortages in the global financial system led to outflow of money from London-based institutions.

This free fall in rates continued till the US Federal Reserve announced an arrangement to open permanent Dollar swap lines with Central Banks worldwide.

Negatives Piling Up Against the GBP

Despite the Bank of England’s decision to cut interest rates to 0.1% and increase its government and corporate bond holdings by £200 billion on March 23, 2020, the GBP continued to be volatile. The Bank of England’s trade-weighted sterling index was 12% weaker than the pre-referendum levels, as of June 26, 2020. An economic slump has added to the woes of the currency. On June 16, 2020, the GBP dropped 0.2% against the USD to $1.25, due to the lowest UK inflation data since June 2016.

The uncertainty over the talks between the UK and EU has hurt investor sentiment towards the Pound. Traders want to invest in a currency that has higher liquidity and is broadly considered safer.

But currently, several forces are lined up against the GBP, which becomes highly vulnerable when broad risk sentiment declines among investors:

  • A second wave of coronavirus infections in the US and China is threatening the UK and the global economy.
  • Insistence of PM Johnson to not extend the 12-month transition period, which means that the UK will leave without a trade deal, if it has to. This will impact UK businesses and the economy massively.
  • The UK can get caught in the middle of rising US-China trade tensions.
  • US Presidential election is scheduled for November 2020. While President Trump is a Brexit supporter, his challenger, Joe Biden, isn’t. This will make the UK’s attempts at bilateral trade talks with the US trickier.
  • The Bank of England’s indication to go into the negative interest rate zone.
  • The UK’s massive trade deficit, which could be wider than some countries, like Turkey and South Africa, by 2021.
  • Risk of persistently high unemployment rate in the UK.

London’s Battle to Remain the Global Financial Hub

Membership of the EU is one of the attractions of the city of London. There is the whole financial services exoskeleton to be considered, including accountancy firms, banks, investment funds, legal firms and the like. The industry generates more than 2 million jobs and accounts for 50% of the UK’s $31 billion trade surplus in services. A large part of EU-based financial activities directly or indirectly originate in London.

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Image Source: https://www.toptal.com/finance/market-research-analysts/brexit-and-its-effect-on-the-uk-european-and-global-financial-sector

There is a chance of this sector dwindling, if a deal fails to emerge between the two nations. London could lose prominent bank headquarters, some of which have already begun to move to Frankfurt, Madrid and New York, to mitigate risks. Passporting laws that had earlier helped these institutions cut through red tape and hefty financial cost of transactions in serving EU-based customers, will cease to exist post December 2020.

If London loses its sheen as the global financial hub, so will the British Pound. Capital outflows from the City of London and rise of unemployment will take the Pound lower.

What Will it Mean for Forex Brokers and Traders?

It is clear that the pandemic and Brexit uncertainty have brought in persisting instability and volatility in the Pound. Currently, there is a consensus that traders can’t bank on the Pound. Bank of America analysts notice a huge difference between the rates at which investors are willing to buy and sell the Pound, which is wider than that for other major currencies.

As of April 2019, GBP accounted for 13% of market share among the most heavily traded global currencies, according to stats provided in the Bank of International Settlements’ (BIS) April 2019 Triennial Central Bank Survey. The BIS also put the UK as the biggest forex trading hub in the same report. With $2 trillion in spot trades across the total market each day, the UK accounted for 43% of global trading activity in 2019.

If the GBP declines to drastic levels and loses its place among the major currencies, trading platforms could experience liquidity crises. Massive selling of the GBP could ensue, and higher implied volatility levels would make it riskier to invest in. In that case, brokers will need to concentrate on renewed trader education, focusing on risk management tactics for trading a highly volatile GBP, just like they do emerging market currencies. Spreads could become wider, as would commissions and other costs associated with trading.

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Image Source: https://www.reuters.com/article/us-global-sterling/column-u-s-election-adds- another-twist-to-sterlings-brexit-blues-idUKKBN23X172

Low Sterling Rates Good for Foreign Investments

Declines in the GBP, on the other hand, could mean a surge in foreign investments in the country, which could boost British businesses. Lower Pound Sterling rates led to a sharp increase in the value of mergers and acquisitions of UK companies by overseas businesses, which stood at £18.4 billion in Q2 2019, up from £7.6 billion in Q1, according to the Office for National Statistics (ONS). Much of this could come from China, which has shown a great deal of interest in UK assets in the past. The country made 15 large acquisitions in the UK in 2019.

Since economies have started re-opening in Q2 2020, China has seen a faster recovery rate than many other countries, including the US and Germany. Its economic strength could also boost oil prices, which it imports in massive quantities. A surge in oil demand could lead to the weakening of the US Dollar, leading to a surge in the British Pound.

We Asked Finance Pro Andrew Saks-McLeod from Finance Feeds https://financefeeds.com/

1. What is the biggest challenge for the pound right now?

The biggest challenge in keeping the Pound strong is for UK banks and manufacturers to continue to resist the temptation to sell their entire supply chain to China, as has happened in North America. The Chinese Communist Party has managed to gain complete control of the US economy and government by infiltrating the supply chain with state owned Chinese companies supplying large US corporations, which are now so dependent on their Chinese suppliers that they are influencing the Senate and House, overruling the will of the President, giving the Chinese government exactly what they set out to obtain, control of the US. This has resulted in capitulation to the political lockdowns and 40 million unemployed people, weakening the nation and its currency. The Pound will always remain strong as long as the UK’s extremely wealthy and highly organized economy is kept independent and away from the influence of government officials from socialist countries in Europe, or communist China.

2. What advice would you give traders wanting to trade it?

I cannot give advice, but I would say that the GBP is looking set to take the USD’s place as the de facto reserve currency. It was until 1944, the year in which the US Dollar became the world’s reference currency, during the heyday in North America of victory over European oppression, at a time when the world looked toward the United States as the facilitator of economic and personal freedom. This has come to an abrupt end, and unfortunately the tail is wagging the dog in America, and the nation’s economy is being dramatically affected. Who cares? You may ask, and that would be understandable because America’s free and enterprising nature always allows it to recover very quickly from any blip, but this is not a blip, and America’s people do not have a say this time, as China is now in charge. For this reason, the GBP may well look set to become the world’s reference currency, placing it in a very good and reliable position for trading. It is, after all, the most valuable currency in the world and has always been so.

3. Where do you think its heading in the next couple of months?

Upwards. The UK will be one of the only nations in the world to retain some of its structure. Of course, it has been badly affected, especially in the small business sector, because of the way it also capitulated to global propaganda instead of preserving itself the way Sweden did, but still, the UK is independent, strong and has a diversified and well organized economy, as well as London being the world’s financial center which will always be the case. I think it will be more a case of the UK stagnating, whilst other economies tank.

We also asked TIOMarkets Chief of Risk, Dave Hannigan https://tiomarkets.com/

1. What is the biggest challenge for the pound right now?

The Pound is getting caught between domestic issues such as Brexit and the UK’s handling of the Covid 19 pandemic and more international concerns including the USD’s reaction to global equity market movements. The biggest challenge right now is to have the investment community believe that the steps taken by the UK government have both protected the economy in the short-term and allowed for it to rebound in a robust manner in the longer-term. A positive outcome from Brexit negotiations is a must for the UK economy to bounce back strongly.

2. What advice would you give traders?

GBP is notoriously volatile compared to some of the other major currencies. The most important thing is to carefully choose where you enter a trade and be disciplined when placing a stop loss. A news headline can have GBP moving very quickly, far quicker than you will have time to react, so make sure you have stop losses in place in case of adverse news.

3. Where do you think its heading in the next couple of months?

That’s a tough question on any given day, but in the midst of a pandemic where the true economic cost is far from being revealed, even tougher. It will boil down to how well the UK can bounce back, how much support both the government and the Bank of England can give the economy and ultimately how long it will take to return to ‘normal’ compared to other countries.

4. Any final comments?

As there is so much uncertainty in the markets at the moment, I would urge some caution and patience until the international picture becomes clearer. Some economies will bounce back quickly and thrive, others won’t. It’s too early to truly pick the winners and losers so pay close attention to all the key indicators over the coming weeks.

We asked Peter Bukov, Axiory Analyst www.axiory.com/

1. What is the biggest challenge for the pound right now?

As with everything, the biggest challenge for the pound is how the British economy will manage the COVID crisis and how fast the economy will bounce back. What might be a plus for the pound is the fact that the Bank of England seems to be the least dovish out of the major central banks. Thus the central bank’s balance should not increase as much as the Fed’s, for example. That could be an advantage for the pound against the dollar, and it might support the sterling over the next months.

2. Where do you think its heading in the next couple of months?

Should the Fed continue to be aggressive in monetary policy and continue to expand its balance sheet at the current pace, we might see a large wave of US dollar selling. That could push the GBPUSD pair back toward the 1.30 threshold, or possibly to 2019 highs near 1.33/1.34. On the other hand, if the economic crisis deepens, demand for the US dollar should accelerate once again, and the cable could decline to 1.20.1.

3. What advice would you give traders wanting to trade it?

Volatility in the FX markets seems to be back in normal — low volatility is the regular regime for FX markets — which means traders might need to consider that some trading setups won’t be very convenient. Heading into the summer holiday season, it is most likely that trading volumes will decline further, and the summer lull could be dull in the FX markets.

Thank you to Andrew, Dave and Peter for your input!

What’s hot in trading this week?

It’s going to be short and sweet, this week. Here’s everything you can’t afford to miss:

● Tuesday’s RBA Rate Decision (AUD) will have many Aussie traders glued to their screens.

● Wednesday will see the release of China’s YoY Inflation Rate for June (CNY); as well as a Eurogroup Meeting (EUR).

● The week’s big events dry up on Friday, following some important employment releases from the Bank of Canada (CAD).

That’s your lot. If you have time on your hands why not spend some of it in our Content Bar. There’s plenty of exciting stuff in there to help you hone your skills, including our recent Regulations Roundup. Contentworks Agency provides analysis, blogging, educational articles and social media management to world leading brokers, Get in contact with our team here.

Speak soon!

The Contentworks team

Reference Sources:

· https://www.ft.com/content/4fd04fd9-7209-4b7c-97a1-97466f226159

· https://www.express.co.uk/finance/city/1290598/FTSE-100-LIVE-index-futures-shares-gains-Global-stocks-dow-jones-london-market-wall-street

· https://www.reuters.com/article/us-global-sterling/column-u-s-election-adds-another-twist-to-sterlings-brexit-blues-idUKKBN23X172

· https://www.reuters.com/article/uk-britain-sterling/pound-near-two-week-lows-on-fears-of-second-virus-wave-brexit-meeting-eyed-idUSKBN23M0V1

· https://www.theguardian.com/business/2019/sep/03/pound-falls-lowest-level-three-years-brexit-election-sterling

· https://www.cnbc.com/2020/01/10/uk-economy-not-brexit-will-drive-the-pound-in-2020-analysts-say.html

· https://www.reuters.com/article/uk-britain-sterling/pound-heads-for-worst-week-since-mid-may-public-debt-surges-idUSKBN23Q1BD

· https://finance.yahoo.com/news/pound-gains-dollar-struggles-brexit-084507660.html

· https://in.reuters.com/article/britain-sterling-open/sterling-edges-lower-after-uk-inflation-data-brexit-fears-weigh-idINL8N2DU1OY

· https://www.toptal.com/finance/market-research-analysts/brexit-and-its-effect-on-the-uk-european-and-global-financial-sector

· https://www.bis.org/statistics/rpfx19_fx.htm

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