Geopolitical Uncertainty Limits the Pound’s Prospects
The Sterling Euro Pair is Down 3.45% for the Year to Date
The International Monetary Fund (IMF) recently slashed US economic growth prospects from the targeted rate of 3% set by the Trump administration to a much more modest figure. The IMF has called out the US for its ‘ambitious’ growth projections. In defense of its position, the IMF believes that the US economy faces multiple problems including an aging population, declining productivity and an economy that is already operating at full employment. Further, the IMF has projected that the Trump administration’s fiscal policy stimulus measures will be unlikely to gain traction in the short term. While the IMF was detailing these projections vis-à-vis the US economy, the Bank of England has instructed UK banks to increase their capital holdings. The United Kingdom’s economy is precariously balanced as Brexit negotiations continue in earnest.
The Summer Doldrums for the GBP
Much like the Fed stress tests for US banks, UK banks are subject to the Bank of England’s Financial Stability Report. The media has been hell-bent on stressing the link between the political situation in the UK, and the GBP. For most of 2017, the GBP/EUR pair has traded in a tight range between 1.12 and 1.13. This long period of consolidation in the currency pair is about to give way to an upswing or a downswing.
We saw weakness in the GBP as a result of the snap election held by Prime Minister May. That she was unable to make gains on the June 8, 2017 general election was bad news for the GBP, but it helped to bolster the FTSE 100 index. Currency traders anticipate that the GBP/EUR will remain range bound (1.13-1.15), with little movement the remainder of the month. Many traders have attributed the slowness in Forex markets to the summer doldrums. With declining volatility, it difficult to anticipate precisely where currency pairs like the GBP/EUR or the GBP/USD pair will move.
Hawks and Doves at the BoE
The EUR appears to be gaining the ascendancy over the sterling, and we may see a reemergence of European dominance as Brexit talks continue. The current support level appears to be 1.1250, but if the pound breaks lower, the GBP/EUR pair could move below 1.1000. The resistance level for the currency pair is holding at 1.1550/1.1560. In the event that there is a degradation of trader confidence in the sterling, it will have to be driven by soft UK economic data. For starters, there is an increasing move towards hawkish policy at the Bank of England. The 5:3 vote in favour of maintaining the bank rate helped to boost the sterling.
However, Bank of England governor, Mark Carney has been rather circumspect about the prospects of a rate hike for UK. After the split vote by the Monetary Policy Committee (MPC), traders did not go long on the GBP for a sustained period of time. Persistent inflation and slow real wage growth remain the bugbears for the UK economy. Until the Brexit fears reverse, and UK banks have clear direction vis-à-vis their arrangements with Europe, we will not see much in the form of a strengthening sterling. The latest member of the MPC (Silvana Tenreyro) is a dove, and she will replace one of the hawks (Kirsten Forbes).
For this reason, and others, the GBP is likely to trade in a tight range through July.
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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.