Will the GBP bounce back in 2017?
Is the Sterling Made of Solid Gold?
Barclays analysts believe that the GBP/USD pair will climb as high as 1.32 by the end of 2017, and within 12 months that rate could hit 1.38. Currency traders have been relentless in their shorting of the GBP. The beleaguered UK currency plunged to decades-long lows against the greenback, and other currencies in the run-up to the Brexit referendum. While the currency has stabilized somewhat since then, it remains severely undervalued.
The GBP has been scrutinized against multiple metrics, and according to Oxford Economics, it is undervalued across the full spectrum. Major investment brokerages including Nomura, Barclays and Citi believe put options (short positions) against the GBP would reverse if there are positive developments between London and Brussels. That the UK has already invoked Article 50 of the Lisbon Treaty is significant. The countdown has officially begun.
Record Level of Net Short Positions on the GBP
The GBP is facing overwhelming negative sentiment from currency traders. The number of net short positions as at March 28, 2017 was -104,075. This level ranks among the worst for the GBP in many years. A week before that on Tuesday, 21 March 2017 the total number of net short positions was -107,117 on the GBP. Barclays Global head of Forex, Marvin Barth believes that it is a mistake to go so short on the GBP when the GBP is so cheap. As such, Barclays has future guidance on the sterling at 1.32 by the end of 2017, and 1.38 by April 2018. For its part, Oxford Economics believes that the GBP/USD pair will hit 1.32 by the end of 2017 and 1.35 in 2018.
Europe is also facing increasing pressures with the rise of right-wing parties. Populism was given a major boost with the election of Donald Trump, and it remains uncertain how countries like France, Austria, Italy and others will fair in this regard. If the geopolitical risks across Europe continue, this will weaken the EUR, and strengthen the GBP. As such, it is not out of the question that the GBP/EUR will rise to 1.30 by 2018. If the figures proposed by Nomura are correct, the GBP/USD pair is undervalued by 25%. For Q1 2017, the GBP/USD currency pair recorded its first gain since June 2015, closing at 1.2542.
One of the largest asset managers in the world, Blackrock has adopted a surprisingly bullish stance on the greenback. It’s not all doom and gloom for the UK with a weak GBP however. Currency weakness has allowed the UK to become an attractive destination for European tourists. Further, UK export potential has boomed since the pound weakened. As such, the UK current account deficit has been sliced in half (December 31, 2016). As at Q4 2016, the current account deficit is now -2.4% of GDP, down from -5.3% of GDP at the end of Q3 2016. The latest figures indicate that trade in services forms 5.4% of GDP, while there is a -6.4% of GDP for trade in goods.
Don’t Forget April Seasonality for the USD
there is plenty more upside potential for the GBP/USD pair this month. April is typically a month where the GBP rises sharply against the USD. This trend has been apparent over the past 12 years, as there has been an historic fall in US treasury issuance in April. The FTSE 100 index typically sees a huge influx of foreign direct investment, and oil refineries open up after their routine maintenance shutdowns. This all boosts GBP demand and weakens the USD.
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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.