Investment Ideas

Will the GBP/USD’s rally come to a halt?

Will the GBP/USD’s recent rally come to a halt?

Jamil Jolil
Posted Fri 5 June 2020
by Jamil Jolil

The GBP/USD has had a positive rise over the past two weeks. The price of the GBP/USD has appreciated more than 3.9% (Blue), (Illustrated on the chart below). During this period, the GBP has outperformed the benchmark USD by a significant margin.

With the outbreak of the coronavirus, the GBP/USD was one of the currencies, which was hit hard from the coronavirus outbreak. This is because with lockdown’s enacted in the U.K production came to a halt across the country. As a result, investors moved away from the currency on concerns the country would suffer a prolonged recession, reflected with the GBP/USD falling in Q1 (illustrated on the price chart below).

However, with the number of cases declining across the U.K, Prime Minister Boris Johnson announced the economy would be re-opening at a staggered pace. For example, primary schools have begun to return, and non-essential retailers are to return from June the 15th. Furthermore, with the coronavirus pandemic fading, the Bank of England’s (BOE) position on negative interest rates may no longer be required. Last month, Governor, Andrew Bailey, said: “it would be foolish not to consider the use of negative rates at the next central bank meeting in June”. However, the June meeting is unlikely to have major changes given the dramatic shift we have seen over the past few weeks.

Another key factor which can explain the rally in the GBP/USD is the recent USD weakness. Over the past two weeks, the USD has come under pressure across the board. This move was also exasperated the Federal Reserve’s (FED) QE program, which has seen the supply of dollars outstrip the market demand. This has meant the GBP/USD has been able to climb as investor flows move away from the USD to other currency pairs.

However, despite the rally, a variety of risks remain. One being Brexit negotiations. Today Chief EU negotiator Michel Barnier stated that “progress on the UK-EU negations has been slow, and the U.K has begun to renege on some of the commitments made under the draft bill”. As a result, “it is unlikely that any progress will be made by the end of the June deadline”. This is a pivotal as the risk of no agreement by June leaves open the door for a Hard Brexit by Q4 2020, something which Boris Johnson has said he welcomes in the past. Furthermore, today we saw the release of U.S employment data including the Non-farm payrolls. The results beat the market expectations by a significant margin. For example, Non-farm payrolls increased by 2509K vs -20.687 million in April. Also, the unemployment rate came in at 13.3%, which beat the market expectation of 19.7%. As a result, the FED could announce they will limit stimulus going forward given the economy is rebounding at the next meeting. This could see the USD regain some footing after weeks of depreciation. Consequently, although the GBP/USD has staged a rally, several key issues remain in contention.

Implications and bottom line? The GBP/USD has staged a significant rally over the past few weeks. With the U.K economy re-opening, investors have turned more optimistic that the BOE will not have to deploy negative rates at its next meeting. Also, the widespread decline of the USD has seen the GBP/USD benefit. However, today’s rhetoric from Michel Barnier raises risks of a no-deal Brexit appearing once again. Illustrated on the chart below, The GBP/USD has broken out of its uptrend. Will the price continue to rally? Or will concerns on the Brexit negotiations see the currency pair consolidate lower? The upcoming weeks will be a key watch.

Sources: Wall Street Journal, Financial Times.

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