GBP/USD forecast for 20.08.2020

August 20, 2020

Fundamental Pound forecast for todayDmitri Demidenko

Fundamental Pound forecast for today

Sterling bulls were set back by the Fed

What goes up must come down. The GBP seemed to be the winner. Robust data on the UK inflation in July, investors’ unwillingness to consider the stalled situation with the Brexit pushed the [GBP/USD][1] up to the eight-month high. [Long positions ][2][opened at 1.302][2] and boosted on the breakouts of the [resistances at 1.3135, ][3][and 1.31][3]9 seemed to be winning. But that is the Forex market. When one looks a winner, there soon comes a failure.

I have many times stresses that the [GBP/USD][1] rally is the story of, first of all, the weak US dollar. Yes, the pair was above the pre-crisis levels; however, the trade-weighted Sterling index is still lower than it was before the pandemic. Moreover, six-month pound risk reversals signal that traders prefer to sell the GBP till the end of the transition period. It suggests a no-deal Brexit; although Boris Johnson tells Ireland’s prime minister Micheal Martin, he wants to strike a deal with the EU.

The [GBP/USD][1] rally, ahead of the release of the FOMC meeting minutes, resulted from the UK inflation rise to 1% that hardly deceived anyone. The BoE won’t sound hawkish because of it; the bond market simply ignored the information. Furthermore, the analysts polled by Bloomberg say that the surge in consumer prices is temporary. A drop in energy prices and weak employment will hold back the CPI growth. If the BoE forecasts are not met, and the UK economy doesn’t recover by the end of 2021 (according to Bloomberg experts, it will be 5% than before the crisis by that time), Andrew Bailey and his colleagues will have to lower the bank interest rate and expand the QE pace.

Dynamics of the UK inflation

![LiteForex: GBP/USD forecast for 20.08.2020][4]

Source : Bloomberg.

Forecasts for UK GDP

![LiteForex: GBP/USD forecast for 20.08.2020][5]

Source : Bloomberg.

So, the sterling outlook is quite negative amid several factors. Increased risks that the BoE will continue the rate-cutting cycle, unsolved Brexit issues, and the weakness of the UK economy. The GBP/USD rally looks overstretched, and the minutes of the FOMC July meeting has proven it. Once the Fed expressed unwillingness to control the Treasury yield growth or lower the interest rates below zero, investors have started buying the dollar.

The [GBP/USD][1] fall was deep. If the pair breaks out the supports at 1.3055 and 1.302, the correction is likely to continues down to 1.2945 and 1.2875. However, the long-term outlook for the sterling, in my opinion, is bullish. Boris Johnson has already proven his skill to solve problems at the last moment. He is not going to undermine his reputation, already spoiled by COVID-19. Yes, there are only seven weeks left, and the parties have not yet come to a compromise. Investors, after all, are used to the fact that London solves the problems at the last moment.

As for the weakness of the UK economy, which economy is not weak now? Every country has its hardships, and the UK will not necessarily be the worst to manage them. I am still optimistic about the [GBP/USD][1] future. Following the short-term sell trades, I will consider long-term purchases.

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Price chart of GBPUSD in real time mode

![Fundamental Pound forecast for today][8]

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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