Forex GBP/USD

Pound Sterling On Rocky Ground, The Greenback Set To Gain More Ground 

 

The UK pound is one of the most volatile currencies in the market thanks to the Brexit referendum in 2016. This week, the performance of the GBP continues to mirror the prospects of a no-deal Brexit. The GBPUSD sentiment this week is largely bullish as the pound struggles to gain some ground against the US dollar.

On Thursday, the Monetary Policy Committee (MPC) of the Bank of England (BoE) issued a statement in which it made clear that the UK economy is in bad shape. In the statement, the MPC said that its members voted to stay the bank rate at 0.75% until the next meeting in November. Interestingly, economists and other analysts expected this outcome from the MPC.

The MPC believes any change in the bank rate could do more disservice to an economy that is already ailing. Although the UK economy is growing, the rate of growth appears to be slowing. Nonetheless, the members of the MPC were certain that the UK economy is not due for a recession. However, knowledgeable observers read a different message from the fact that the MPC downgraded the expected GDP growth for Q3 2019 by 0.1% to 0.2%.

Performance against the US dollar

The performance of the pound sterling against the US dollar on a month-to-date basis is positive. So far, the GBPUSD is up 2.6% month-to-date. However, this momentum is showing signs of doubts, especially in the week started Monday, September 13. On Monday, the GBPUSD pair closed at 1.23491 and grew to 1.25192 in mid-week trading. The pair, however, pared the gains by a significant number of pips as the week draws to a close. At the time of writing, the pair was trading at 1.24788 and still trending downwards.

The fluctuating pound is on rocky ground, and it seems to be getting messier. In 2016, the British voted to stay out of the EU. Since then, it has been a matter of exiting one crisis and entering another. At the start of September, the House of Commons passed a law compelling the UK PM, Boris Johnson, to delay Brexit past the October 30 deadline if there is no deal. Nonetheless, the PM seems to be adamant that Brexit must happen as planned, with or without a deal.

In its decision to keep the bank rate unchanged, the MPC cited the political cloud kicked up by Brexit. According to the MPC, the “political events could lead to a further period of entrenched uncertainty.” Nevertheless, the MPC was not forthcoming on the degree to which these political events might entrench uncertainty in the economy.

GBPUSD outlook

Brexit continues to be a major influence on the future performance of the pound sterling. According to the OECD, a hard Brexit will cut down the UK’s economy by 3% by 2022. Comparably, the EU economy will shrink by only 0.6% in the same period. In January this year, Rabobank analysts noted that a hard Brexit would hurt the UK’s supply chain, especially in the agriculture sector.

Given the picture painted by the analyses, it is almost certain that the GBPP will continue to perform poorly in case of a no-deal Brexit. Resultantly, investors might see the GBPUSD pair edge lower for as long as the Brexit drama stretches on. 

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