On possibility of pound purchases

21. Aug. 2018

If you look at the dynamics of "majors" in the foreign exchange market, then it is easy to find the main outsider - this is the British pound. Yes, the dollar is now stronger than ever, but paired with the pound, it literally works wonders. Even at the end of spring, the GBPUSD pair was quoted around 1.43, and today it is slightly more than $ 1.27 for a pound. The reasons for this dramatic decline are generally obvious. Starting from Brexit and ending with a general strengthening of the dollar in the foreign exchange market. The whole question is, how relevant are these reasons NOW and in the current FUTURE. Let's try to figure this out.

Decrease factor number 1. BREXIT.

When at the start of 2018, the UK and the EU advanced in the negotiation process, the pound literally soared, strengthening against the dollar by almost 1000 (!) points. But when there was talk about the lack of progress, which the internal political crisis in Britain was imposed, the pound lost the same 1000 points as quickly. That is, the Brexit factor today is the key. Despite all the apocalyptic predictions about the exit of the UK from the EU without a deal, one must understand that now the bidding process is in progress and it is in full swing. At stake is very much, so there is nothing surprising in that the parties loudly slam the doors leave the negotiations. This is part of the "game". But this game is limited in time, we will remind, official terms of an exit of the Great Britain from EU fall in March 2019. That is, the account of time already goes not for months, but weeks or even days. And this means that the denouement is close. That is why it is necessary to act now, because then it can be trite late.
Why do we think that in terms of Brexit for the pound will not be worse? Last week, Minister of International Trade Liam Fox said that the risks of withdrawing from the EU "without a deal" are about 60%. Then his comment was confirmed by both the head of the Bank of England Mark Carney and Prime Minister Teresa May. That is, the first persons of Great Britain created a consensus about the most negative variant. What does it mean? This means that it will not be worse. The worst has already happened, and it has already been included in the price. Any other development of events (be it the holding of a referendum on the abolition of Brexit, the conclusion of an agreement with the EU) will be a positive force majeure for the pound, an occasion for growth. In total, from the point of view of Brexit, the pound reached the bottom. And this means that the time for his purchases has come.

Reduction factor number 2. Strong dollar.

Strengthening the dollar in the foreign exchange market, which we observe recently - this is a direct result of the "trading wars". And it's not so much the strength of the dollar as such, but the fact that other countries in response to the increase in tariffs from the US devalue their own currencies (see the dynamics of the Chinese yuan, Indian rupee, Turkish lira, the Russian ruble and even the euro, as well as the Australian and Canadian dollars). As a result, the dollar is growing. But this growth eliminates the effect for the US of unleashed trade wars. National producers of the United States benefit from the growth of tariffs, but they lose a lot because of strengthening the dollar. As a result, the overall effect is close to zero. This is not satisfied with the main initiator of trade wars - Trump. He is beginning to "bomb" Twitter more and more with appeals for the need to reduce the dollar. In fact, this week among the largest investment funds there is a lot of talk about the imminent start of US interventions in the international currency market with the purpose of local devaluation of the dollar. And this means that the growth potential of the dollar is limited and the chances of developing a full-fledged correction on it are maximized.
As you can see, the dollar factor from the reason for the decline of the GBPUSD pair may turn into an occasion for its growth.

Several arguments for the growth of the pound

The Bank of England raised the rate to 0.75%.

Pound ignored this fact. But in fact, it is a very serious bullish signal and an excuse for buying pound. Obviously, the effect of the rate hike has so far been delayed in time, but it will be recalled when markets become less one-sided in their estimates of the prospects for the GBPUSD pair.

Macroeconomic statistics for the UK does not look hopeless.

One of the main "fears" of Brexit was the slowdown in the UK economy. Nevertheless, the latest statistics show that not everything is bad in the UK (GDP came in the framework of forecasts, statistics on the UK labor market, also was not devastating, but rather, on the contrary, the unemployment rate declined, that is a rather strong positive signal, if only because unemployment has reached a minimum mark for the last 43 (!) years.

The UK stock market is the only undervalued developed market in the world.

According to Bank of America analysts, the UK stock market is the most undervalued among developed countries on the 12-month time horizon. That is, it is potentially very attractive for global investors. Accordingly, for purchases of shares on it, investors will need pounds, which will stimulate demand for British currency in the foreign exchange market and push the GBPUSD pair up.

The strongest oversold of the pair.

The GBPUSD is strongly oversold even on daily charts. Purely technically, this is an occasion at least for fixing profits on short positions.

As a result, we believe that further decline in the GBPUSD pair is devoid of fundamental grounds, which means that the potential for the fall is almost exhausted (or even exhausted). That is, the time for purchases of the GBPUSD pair has come. The goals of growth are ambitious enough and extend up to 1.43. What will act as a trigger for the growth of the pair: US intervention in the foreign exchange market to reduce the dollar rate, news from the Brexit fields, or something else, is difficult to say for now. But the current situation for the pound can be described as "there is simply nowhere worse". Therefore, it is only a matter of time when the mood in the market will change and the pound will buy. Our recommendation is to play ahead and buy the pound right now.