Written by Lukman Otunuga, Research Analyst at FXTM
It has now been over two years since the historic EU referendum, but uncertainty surrounding Brexit and concerns over Britain’s economic outlook remain as much a mystery as ever.
Despite the Pound’s unexpected resurgence in early April that resulted in prices peaking above 1.43 on expectations of an imminent UK interest rate hike, the rally in the Pound soon crashed to the ground like a house of cards. Another swerve in the UK interest rate outlook from BoE Governor Mark Carney, a string of disappointing economic data domestically and tepid growth figures led to a rush of investors selling the Pound. The Pound crashed, and many remain downbeat on the currency to date. Reoccurring concerns over a lack of progress in Brexit negotiations and uncertainty over the UK Prime Minister Theresa May’s future are seen as a risk for the Sterling to remain on the back foot as trading for the second half of the year gets underway. A broadly stronger Dollar is likely to compound a bearish outlook.
As we head into the third quarter of the trading year, the performance of the Pound is likely to be influenced by BoE rate hike expectations and any progress in Brexit talks. Although June’s unexpectedly hawkish BoE meeting has raised speculation of a potential hike in August, investors should not expect too much. Heightened political risks, Brexit-related uncertainty and global trade tensions may force the BoE to delay monetary policy normalization this year. There is a strong suspicion that the central bank could remain on standby until there are consistent signs of improving domestic economic data, rising wage growth and easing trade tensions.
It must be kept in mind that the recent resignations of the Brexit and Foreign Secretaries have not only sparked political instability in the United Kingdom but fueled more uncertainty over the direction of Brexit. Although the UK government has finally set out its soft-Brexit blueprint, it all depends on how the European Union responds to the proposal. If the EU rejects the White Papers, fears could heighten over a possible no-deal outcome. Such an undesirable scenario is likely to create economic and political instability across the board with the shockwaves potentially reaching the Middle East.
Brexit & the Middle East
While the Middle East in some respect may be shielded from the negative impacts of Brexit, some industries such as tourism and real estate could still be hit. With most countries in the region pegging their currencies to the Dollar and a handsome chunk of revenues in the Middle East recouped from oil, downside risks created from Pound volatility have been mitigated. However, the uncertainty Brexit presents may stimulate risk aversion, consequently impacting equity market and local stocks in the region.
A welcome development from Brexit could be a scenario where the United Kingdom and nations in the Middle East directly agree on beneficial trade deals with each other. This strategy may end up supporting economic growth both ways as key products and services from the UK make their way with greater ease to nations such as Saudi Arabia.
Focusing back on the GBPUSD, it is worth noting that the Dollar has scope to extend gains as expectations mount over the Federal Reserve raising interest rates at least twice more this year. I believe the monetary divergence between the Fed and BoE supports the argument over the GBPUSD remaining fundamentally bearish long term.
Taking a look at the technical picture, the GBPUSD has repeatedly failed to conquer the solid 1.4392 resistance level this year. The solid breakdown and monthly close below 1.3450 suggest that prices are coming under increasing selling pressure.
The three bearish candlesticks on the monthly charts compliment a bearish view and suggest that the GBPUSD could challenge 1.2940 at a later date. The weekly timeframe illustrates a similar bearish picture with 1.3030 in sight. A decisive weekly close under this level could potentially encourage a further decline towards 1.2762.
To read more market analysis from FXTM please visit: FXTM.