The British pound currently has no chance of growth and yet, it managed to get away from a 20-month low on Monday paired with the dollar, and today sterling continues to try to strengthen. Traders became interested in buying British currency due to the fact that the British Prime Minister Theresa May decided to postpone the vote on the Brexit agreement in the House of Commons of Great Britain to the end of January 2019. It seems that the specifics contributed to the reduction of political uncertainty and improve market sentiment.
However, the problems of the British prime minister with the approval of the agreement on Brexit by the parliamentarians have not gone away, and the situation is unlikely to change in the near future.
British high-ranking officials on Tuesday will discuss the possibility of secession from the EU without a deal, or without preserving access to the single European market. This means that the country’s legislators are seriously considering the possibility of a “tough” Brexit scenario that could drag a pound to multi-year lows.
In addition, the potential strengthening of the dollar in connection with the upcoming Fed meeting, at which the rate increase is expected, will play against sterling. This event may trigger price losses of currency risk along the entire broad market. Therefore, you can use the fact that the GBPUSD rate in the coming days has a chance to test support at 1.25.
As for the longer-term forecast, the pound may well break out in winners, at least against the euro. The fact is that the sterling appreciated a lot of bad news, and the euro, not yet.
None of these currencies in the outgoing year can boast of any achievements in relation to each other. This is due to the fact that the problems of Great Britain related to leaving the group were offset by political uncertainty on the continent. According to OppenheimerFunds, the slowdown in economic growth in the eurozone will put pressure on the single currency rate. At this time, Commerzbank analysts predict that Britain will postpone its exit from the EU as a result. Such news will boost the pound by the end of March by more than 3% against the euro.
Now the pound is crushed, and by historical standards is extremely cheap, so it can be strengthened on any positive news. As for the euro, its prospects were overshadowed by the pessimistic data and the ECB’s forecast of a bias towards reducing economic risks. The single currency has a mass of its own political “demons”. This, in particular, the opposition of Italy and the EU, the protests in France, insecurity against Brexit. Although it is worth noting that on Monday, the euro grew on the message of the assignment of the Italian government to Brussels.
Focus on Brexit
Vision experts OppenheimerFunds suggests a rise in the pound by the end of March to 85-87 pence per euro compared with the level of closing on Monday. Commerzbank expects the pair to move to 87 over the same period. At the same time, the average forecast of Bloomberg respondents indicates a more modest rise, economists see sterling at 88 pence at the end of the first quarter of 2019.
Bank of England this week is likely to signal once again that its short-term forecasts depend on Brexit. The rate hike in Britain is not expected until 2020, however, the relatively positive result of Brexit will allow the management of the Central Bank to consider the possibility of tightening the policy. The pound in this situation will rise in price even more.
Societe Generale considers it dangerous to delay Brexit negotiations, as the risk that “nothing will be completed on time and that after the deadline at the end of March the negotiations with the EU will be extended”.
“This will leave the trade-weighted index of the pound in the lower limit of the range that has developed after Bretton Woods, and at the same time, like an albatross, it will curl around the neck of the euro,” experts write.
The material has been provided by InstaForex Company – www.instaforex.com