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GBP/USD forecast 04.06.2020

June 4, 2020

June 4, 2020

Pound keeps the distanceDmitri Demidenko

The GBP depends on the whims of a single person

What is more dangerous, the pandemic or Brexit? The [GBP/USD][1] rally to its monthly high gives a clue. As the epidemiological situation improves and the world’s major economies reopen, investors are willing to sell safe havens, including the US dollar. The risks of breaking foreign economic relations, a further slowdown in Britain’s GDP, and even the introduction of the negative interest rates by the Bank of England are losing their importance. There are even talks in markets that, if the transition period is not extended in June, the uncertainty will still decline, as there will be only two options out of three. All of this supports the pound.

Of course, the share of the US dollar in the total volume of Forex operations is much greater than that of the sterling. Besides, the impact of COVID-19 on the UK economy is much stronger than that of Brexit. A no-deal Brexit, according to the UK government’s estimates made in 2018, will result in the GDP contraction by about 8% in the next 15 years. The Office for Budget Responsibility warns that the pandemic could cause a 13.8% GDP drop in 2021. According to Deutsche Bank, in case of a no-deal Brexit, the economy will lose 1.5% in 2021 alone, and it will drop by 8% by 2030. In this case, the Bank of England will have to lower the interest rates below zero.

Therefore, the coronavirus is obviously more dangerous than Brexit. If so, the [GBP/USD][1] rally looks natural. However, the pound is strengthening not only versus the US dollar but also against the euro that is also strong amid the EU huge fiscal stimulus. The pound monthly risk reversals reached the highest level since mid-March.

Dynamics of the pound risk reversals

![LiteForex: GBP/USD forecast 04.06.2020][2]

Source: Bloomberg

I think the matter is in psychology. The UK’s unwillingness to make concessions to the EU to reach a compromise and at least extend the deadline allowed investors to price a no-deal Brexit in the [GBP/USD][1] and [EUR/GBP][3] quotes. Once there appeared the hope for the Brexit deal, the sales on rumors were replaced by the purchases on facts.

However, the sterling’s rally confuses neither hedge funds nor analysts. Hedge funds continue increasing their pound net shorts in the derivatives market over the six consecutive weeks, including the week ending on May 26. Reuters experts see the [GBP/USD][1] fall down to 1.23 by late June. However, the pair is expected to rise to 1.26 in late 2020, as they expect the UK-EU deal to be signed.

In my opinion. Boris Johnson’s unwillingness to extend the deadline will keep the uncertainty strong, which weighs on the UK securities. The FTSE 100 is trading about 17% lower than it was in January, while EuroStoxx 600 is about 13% down, and the S&P 500 has lost about 5%.

Dynamics of stock indexes

![LiteForex: GBP/USD forecast 04.06.2020][4]

Source: Financial Times

I believe the transition period will hardly be extended, which suggests that the sterling’s rally went too high, and it makes sense to sell the [GBP/USD][1] if the support at 1.245 is successfully tested. After all, who knows what Boris Johnson will do? I recommend those who do not want to risk their money because of the whims of a single man to be careful and monitor the GBP market staying at a distance.

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Price chart of GBPUSD in real time mode

![Pound keeps the distance][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. cdn.liteforex.com/cache/uploads/blog_post/fundamental_analysis/pound-risk-reversal-04-06-20.jpg?w=30&s=d759b950e930059e788ece88e8aaec51
  3. my.liteforex.com/trading/chart?symbol=EURGBP&returnUrl=true
  4. cdn.liteforex.com/cache/uploads/blog_post/fundamental_analysis/ftse-spx-04-06-20.jpg?w=30&s=5930d4c2d2eff1ca8ea148f171018ef2
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  7. cdn.liteforex.com/cache/uploads/blog_post/fundamental_analysis/liteforex-blog-gbpusd-04-06-20.jpg?q=75&w=1000&s=ae3955adb22fa8bf6d53816976c2e27c