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GBP/USD forex forecast for 21.05.2020

May 21, 2020

May 21, 2020

Pound is a master of a dead cat bounceDmitri Demidenko

Open positions on the GBP/USD and the EUR/GBP according to the

changes in global risk appetite

The S&P 500 rally and the euro growth have proved the weakness of the GBP. The [GBP/USD][1] growth towards 1.23 was immediately used to enter shorts, looking again as a dead cat bounce. It is a popular Forex price pattern, which signals that the bulls are weak, they are trying to break the downtrend but fail. The problems of the sterling are obvious, and the fact that the situation is getting worse continues to be of concern.

There are three fundamentals factors suggesting selling the [GBP/USD][1] or buying the[ EUR/GBP][2], depending on the performance of the US dollar. They are Brexit, negative interest rates, and the weakness of the UK economy. A few weeks left before the deadline, July 1, when it will be decided whether the transition period should be extended or not. I still don’t believe that even the participants of Boris Johnson in the EU summit will change the situation much. London pretends to not understand why the EU is not willing to sign a Canad-style trade deal. However, the answer is simple. The EU doesn’t want to have a strong rival in a close neighborhood. A lack of progress in the Brexit talks pushes up the volatility, encouraging to sell off the pound.

Unless the transition period is extended and the trade deal is signed, the UK will face new tariffs, which will weigh on the economy that is already weak amid the pandemic. After the UK unemployment had hit its record high at 2 million, the Chancellor Rishi Sunak predicted the UK will be clobbered by a severe recession “the likes of which the nation has never seen before”. The V-shaped recovery is impossible under the current conditions, the UK officials have to find a way to manage the debt that will be growing amid the fiscal stimulus.

One of the solutions is the introduction of negative interest rates by the Bank of England. Just a week ago, Andrew Bailey said the BoE was not considering cutting interest rates to below zero. However, in late May, he has changed the tone suggesting that the BoE is studying the experience of other central banks in this sphere and is weighing its potential outcomes and side effects. A formal argument for the further easing of the monetary policy is the drop in the inflation rate from 1.5% to 0.8 in April.

Dynamics of UK inflation

![LiteForex: GBP/USD forex forecast for 21.05.2020][3]

Source: Bloomberg

However, the real reason is the possibility of selling negative-yielding government bonds, which will significantly reduce the cost of servicing all loans. In fact, the buyers of the securities will pay for lending money to the government. The first experience was successfully implemented: the Treasury managed to place 3-year bonds at a rate of -0.003% for £ 3.8 billion.

Dynamics of UK bond yields

![LiteForex: GBP/USD forex forecast for 21.05.2020][4]

Source: Wall Street Journal.

Therefore, the sterling is pressed down by numerous factors. The political environment is unfavorable in the UK, the economy is weak, investors expect the BoE to cut the interest rates to below zero. If the US dollar is being sold off versus the major currencies amid an increase in the global risk appetite, it makes sense to consider buying the [ EUR/GBP][2] with the targets at 0.91 and 0.92. If the greenback remains in current positions, it will be relevant to continue selling the [GBP/USD][1] with targets at 1.2 and 1.18.

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Price chart of GBPUSD in real time mode

![Pound is a master of a dead cat bounce][7]

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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  1. my.liteforex.com/trading/chart?symbol=GBPUSD&returnUrl=true
  2. my.liteforex.com/trading/chart?symbol=EURGBP&returnUrl=true
  3. cdn.liteforex.com/cache/uploads/blog_post/fundamental_analysis/cpi-uk-21-05-20.jpg?w=30&s=4ac8aa2df9749ebe1cb83527462d91dd
  4. cdn.liteforex.com/cache/uploads/blog_post/fundamental_analysis/bonds-uk-21-05-20.jpg?w=30&s=dc0c0c60b00d6fc19bf6765fcfd11783
  5. my.liteforex.com/?category=analysts-opinions&slug=pound-is-a-master-of-a-dead-cat-bounce&openPopup=%2Fregistration%2Fpopup&utm_source=blog&utm_medium=article&utm_campaign=bonus
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  7. cdn.liteforex.com/cache/uploads/blog_post/fundamental_analysis/liteforex-blog-gbpusd-21-05-20.jpg?q=75&w=1000&s=5203b1c6e02761859d183cf14c3b75b3