Up, Up & Away! The Sterling Shows Some Steel
The British Pound has finally rebounded against the greenback. After enduring a torrid time since the Brexit referendum on June 23, 2016, the GBP is now firmly in ‘safe’ territory in the mid-1.30 range. The pound was last trading at 1.3484 to the USD (September 18, 2017), briefly retreating beneath the 1-year high as Brexit fears resurface. The 52-week trading range of the cable is 1.19952 on the low end, and 1.3619 on the high-end. That the GBP is currently hovering near the 1-year high is notable.
However, currency traders caution against over-optimism. While UK monetary policy looks decidedly bullish now, Brexit concerns are hanging over speculators like the Sword of Damocles. Prime Minister Theresa May will be giving a speech on Friday, 22 September 2017. Her speech will focus on the Brexit negotiations, and how Britain is progressing through them. The UK government has been put under significant pressure from all sides regarding its lack of strategy vis-à-vis Britain’s extrication from the euro zone.
Foreign Secretary Johnson Confuses Currency Markets
The UK Foreign Secretary, and former London mayor, Boris Johnson stoked additional upset in Britain by a nebulous claim that the UKs exit from the EU will allow some £350 million to be funneled to the National Health Service (NHS) every week. Johnson’s oversimplification of contributions to the NHS do not take into account the fact that the UK will continue to pay the EU for many of the services it currently enjoys. These include agricultural research, scientific research and the like. His fiery rhetoric aside, HSBC Holdings PLC has upwardly revised its forecast for the GBP in light of BOE monetary policy.
GBP/EUR Currency Pair Reverses Course
The Bank of England and its MPC recently indicated that changes to interest rates would be forthcoming, given that the UK economy is performing better than expected. If BOE governor, Mark Carney pulls the trigger on interest rates, there will likely be several rate hikes in a short space of time. Presently, speculators are pricing in the possibility of a hike to the bank rate in November 2017.
That’s the reason we are seeing the sterling spike to its current levels. If HSBC Holdings PLC analysts are correct, the GBP/USD pair could close the year out at 1.35. This is significantly higher than prior forecasts, and it will also reverse the GBPs march towards parity with the EUR. Presently, the GBP/EUR pair is trading at 1.12877, thanks to a late surge on Thursday, 14 September 2017.
In the US, it’s a different ballgame. The USD is on the mend, as evidenced by the US dollar index (DXY) which is now trading at 92.08, marginally higher than the 52-week low of 91.01. Recall that the US dollar index measures the performance of the USD against a trade-weighted basket of 6 currencies, including the EUR, GBP, CAD, JPY, SEK, and CHF. The year to date performance of the US dollar remains weak, with a 10.06% depreciation. Over the past 5 days however there has been a slight turnaround in the greenback’s fortunes as it rallied 0.23%. There are currently bullish signals being relayed through the FOMC (Federal Open Market Committee).
By Wednesday, 20 September, currency traders will have a much better indication as to the USDs short-term trading range. The latest forecast from the CME Group FedWatch tool indicates a 98.6% probability of a 1.00% – 1.25% interest rate on September 20, 2017. By 1 November 2017, there is a 2% likelihood of rates rising 25-basis points in the region of 1.25% – 1.50%. The strongest likelihood of an interest rate hike is Wednesday, 13 December 2017, where analyst expects a 25-basis point rate hike to take place with a 55.8% probability.
Do you think that the British pound’s rise to the mid-1.30 level is sustainable? What factors do you think can help the GBP to reach its pre-Brexit level against the greenback?
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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 iForexTrader.co.uk.