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Will the GBP Perform a Rope a Dope in 2018?

GBP
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December 20, 2017 By: , No Comments

The GBP/USD currency pair is trading around 1.34 heading into 2018. For the year to date, sterling has appreciated from 1.23 by $0.11 to stage what many consider to be a remarkable comeback given the pressures on the pound. The relatively stable performance of sterling in Q3 and Q4 2017 is noteworthy. Brexit pressures and the attendant capital flight have placed a heavy load on the UK economy, but sterling has remained robust. Consider that the current exchange rate remains above the 50-day moving average of 1.327, and the 200-day moving average of 1.299. The convergence of the short-term average exchange rate with the current exchange rate is a positive sign for sterling traders. It reflects stability in prices.

 

GBP/USD currency

 

The GBP/USD currency pair is trading around 1.34 heading into 2018. For the year to date, sterling has appreciated from 1.23 by $0.11 to stage what many consider to be a remarkable comeback given the pressures on the pound. The relatively stable performance of sterling in Q3 and Q4 2017 is noteworthy. Brexit pressures and the attendant capital flight have placed a heavy load on the UK economy, but sterling has remained robust. Consider that the current exchange rate remains above the 50-day moving average of 1.327, and the 200-day moving average of 1.299. The convergence of the short-term average exchange rate with the current exchange rate is a positive sign for sterling traders. It reflects stability in prices.

The UK all share index – the FTSE 100 index – is priced at 7, 552.46 for a year to date return of 5.72%, and a 1-year return of 11.89%. The 52-week trading range of the FTSE 100 is 6,986.44 on the low end and 7,598.99 on the high-end. It is important to note that the performance of the FTSE 100 index is inversely related to the performance of the GBP. Whenever sterling appreciates, the FTSE 100 index moves in the opposite direction. The rationale for this complex relationship is rooted in 70% of the companies on the FTSE 100 index generating their revenue streams offshore.

The FTSE 250 index is an entirely different animal. This UK index tracks companies based in the UK and it is directly correlated with the performance of GBP. The current level is 14,887.70 and it has a 15.06% year to date return and a 17% 1-year return. The correlation is evident in the appreciation of the cable (GBP/USD) for the year to date. From a level of 1.23 to the USD, the GBP has appreciated to 1.34, for an 8.943% rise. The year to date return for the FTSE 250 index is approximately double that, in line with expectations. It is notable that the performance of the FTSE 100 index is lacklustre at just 5.72%.

 

What Should Currency Traders Expect in 2018?

Financial analysis is predicated on more than soothsaying or fortune-telling techniques. There are technical and fundamental factors that determine the relative strength or weakness of currencies. For example, the US macroeconomic arena is being shaped by major forces. These include a tax overhaul which would see the current corporate tax rate dropped from 35% to around 21%.

This will likely spur investment in the US economy, and create demand for USD. In other words, businesses, investors and currency traders will be buying USD and selling other currencies to invest in the US economy. This will lead to a sharp or modest appreciation of the greenback. Other measures to look for include Fed FOMC activity in the US. Every time the Fed adopts a 25-basis point rate hike, this bodes well for the USD.

 

US Economy Poised for Lift-off

During 2017, the USD performed poorly against other currencies, but there is nothing to suggest that the same will occur in 2018. Current revisions to the tax code, deregulation of banks and financial institutions, higher interest rates and other business-friendly practices will certainly play a big part in boosting demand for the USD.

Besides, the levels of US bourses including the Dow Jones Industrial Average, the NASDAQ Composite Index, and the S&P 500 are at record highs. This indicates that something special will have to happen with the UK economy to mitigate the strengthening taking place in the US economy.

What are your thoughts on the performance of the cable in 2018? Do you feel that sufficient progress has been made with Brexit negotiations to enable a GBP rally?

 

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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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