British pound price forecast for September 17 2020

2020-09-17

Pound is playing with fire. Forecast for 17.09.20Dmitri Demidenko

Investors are focused on the fact that the UK violates EU rules. How will it end how will influence the sterling? In the end, there is the [GBPUSD][1] trading plan, as usual.

Fundamental Pound forecast for this week

While the majority believes the pound is going to crash, some traders are buying GBP. The cost of hedging against the [GBPUSD][1] drop is now 30% less than that of hedging against the pair’s rise. Besides, the current levels are appealing to the sterling bulls. At first, it seems that entering the pound’s longs is a crazy idea. The UK domestic market bill has been adopted by the House of Commons. However, if the UK-EU deal is signed at the last moment, the pound buyers will benefit. And the UK negotiators have done this many times.

The second week of September was the worst for the pound since the mass selloffs in March. This resulted from excessive speculative net longs and the fact that investors are again concerned about the Brexit issues. Ahead of the news that Boris Johnson was going to violate the agreement with the EU, hedge funds boosted the net longs up to the highest level over the past five months. Once there was the information about the domestic market bill, large investors have started exiting longs.

Dynamics of pound speculative positions

Source : Bloomberg

Politic, rather than economics, triggered the sterling correction. Despite the reports that the UK unemployment surged to the highest level since 2013, and the inflation rate has slowed down by 0.2%, the [GBPUSD][1] rate started rising amid the talks about the disputes within the Conservative party because of Boris Johnson’s willingness to break up the deal with the EU. What does it mean? Is it just a bluffing to force the EU to make concessions? Or is Boris Johnson willing to withdraw the UK with or without a deal and is prepared for a lawsuit from the EU for breaking the obligations supposed by the agreement? The answer will determine the sterling future trend.

Under such conditions, the BoE is likely to express a wait-and-see attitude at the September meeting. Andrew Bailey and his colleagues will rather wait for more signals about how the economy is recovering, how deep is the employment drawdown. And, finally, the Bank of England will also wait to see how the Brexit story will end. Bloomberg’s experts expect the UK QE to boost by £50 billion, reaching £800 billion in total. The derivatives market projects the cut of the BoE interest rate in February 2021. Morgan Stanley analysts say the interest rate will drop to 0.5% in case of a no-deal Brexit.

Forecasts for BoE interest rates

Source : Bloomberg

If the Bank of England surprises the markets and lowers the interest rates unexpectedly, the [GBPUSD][2] could drop below the bottom of figure 29. Otherwise, the sterling trend will depend on the policy pursued by Boris Johnson.

[GBPUSD][2] trading plan for the week

The UK Prime Minister, announcing the domestic market bill, is going all-in. The EU officials wonder if he is bluffing. Everything looks so real that one may have to throw down the cars. If investors see that Brussels is going to make concessions, the sterling will rise up. It is not yet clear if it makes sense to buy the [GBPUSD][1]. If the pair goes up above 1.31, one could consider entering longs.

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Price chart of GBPUSD in real time mode

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