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Is the 2016 Slump over for the GBP?

GBP
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January 16, 2018 By: , No Comments

Société Générale, a leading European bank is cautioning its clients to guard against GBP strength in 2018. It has been forecast that a second Brexit referendum could significantly bolster the value of the GBP in the currency markets. The June 23, 2016, Brexit referendum saw sterling plummet from 1.47 to a 31-year low before the surge took place. The resilience of the GBP has surprised currency traders, speculators, and analysts across the board. However, bullish sentiment is being tempered, so as not to drive up the value of the GBP. Presently, the UK economy faces many uncertainties relating to the Brexit saga.

A weak GBP is an incentive to UK exporters who benefit from weakness in exchange rates. The cheaper UK goods are in international markets, the better for UK exporters. If GBP strengthening occurs, exporters will lose out and this is what is fuelling demand for derivatives markets. By hedging on the GBP strengthening with CFDs, exporters can benefit from a robust currency. For many leading European and UK banks, the GBP/USD pair – the cable is largely expected to remain in a tight trading range between 1.30 and 1.40 for the duration of 2018.

This would represent a significant strengthening of the British currency, and would not bode well for companies listed on the FTSE 100 index which will be repatriating their profits back to the UK. However, UK companies on the FTSE 250 index which typically lists domestic enterprises will perform much stronger. Recall that the movement in the FTSE 100 index is inversely correlated to the strength of the GBP. Since 70% + of the profits generated on the FTSE 100 index are overseas-based, when they are brought back to the UK, more GBP can be purchased with them. This drives up revenue streams, increases dividends, and boosts share prices. According to most econometrics models, GBP is undervalued on the markets. This means that traders and investors see value in purchasing sterling, rather than selling it.

 

PWC Forecast Rattles Some Feathers

Price Waterhouse Coopers (PWC) predicted that the UK economy grew by 0.4% in Q4 2017 and that GDP growth for the full year amounted to 1.8%. While certainly not indicative of negative growth, it is lower than the recorded growth in 2016. It also marks the weakest annual growth for the UK economy since 2012. However, the UK has been undergoing significant geopolitical volatility because of Brexit negotiations. If talks stall, UK investor confidence may take a hit. Finance ministers from the Netherlands and Spain reportedly indicated their preference for close relations with the UK after the Brexit deal is done and dusted. Ministers from Spain and the Netherlands downplayed the media story.

The cable is trading at 1.37, an 18-month high. Several factors are driving up the GBP, notably weak US inflation data and the US dollar index. The US dollar index (DXY) is currently at 90.37, marginally higher than its 52-week low of 90.28. On the high-end, the DXY was trading at 102.26. For the year to date, the dollar is down 1.91% against a basket of 6 currencies, and down 11.03% over 1 year. However, a strengthening of the cable is unlikely if the Fed hikes interest rates, and economic data indicates an improvement in the US. For now, sterling is short-term bullish, and the USD is still on the back foot.

Do you believe that the GBP/USD pair will rally in 2018? How will this impact your trading activity and your financial portfolio?

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Brett Chatz

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 iForexTrader.co.uk.

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