Pound Price Forecast as of December 23, 2020

2020-12-23

Pound: devil is in the detail. Forecast as of 23.12.2020Dmitri Demidenko

The pound is still highly dependent on Brexit, but as the transition period ends, its prospects become clearer. Let’s discuss this topic and make up a [GBPUSD][1] trading plan.

Fundamental pound forecast for a quarter

Ahead of Christmas, the British pound has tried on the fancy dress of the asset that causes the most concern for investors. The risks of a two-week pound reversal have exceeded those of the world’s major currencies, including the longtime leader, the Turkish lira. Volatility is growing, but no one is in a hurry to buy [GBPUSD][1] despite the fact that the market is almost sure of a Brexit agreement. At least until the public knows its terms. Everybody knows that the devil is in the details.

Pound volatility dynamics

Source: Bloomberg.

When it comes to money, ex-spouses are very scrupulous. The European Union offers Britain 25% of the €650 million in EU fishermen’s revenue, although it was previously not ready to give even 19%. The UK insists on 35%, but it claimed 60% and even 80% before. Bloomberg reported that London offered Brussels 30%, but Downing Street did not confirm this information. The EU chief negotiator Michel Barnier said the UK’s latest proposal on fishing is unacceptable, however, as you know, nothing is impossible.

In fact, the situation is ridiculous. All the fuss is about an amount of money that is less than 0.1% of Britain’s GDP, while a 2021 Brexit could cost the country 300,000 jobs and £40 billion, equivalent to 2% of the country’s GDP. Boris Johnson’s inability to make a deal with the EU will exacerbate an already difficult situation for the UK economy. Despite the fact that the Office for National Statistics improved its estimates for GDP for January-September period and now believes that the economy contracted by 8.6% (compared with previous 9.7%), leading indicators signal that the country will face double recession in October-December.

Dynamics of UK GDP

Source: Financial Times.

[GBPUSD][1] trading plan for a quarter

EY Item Club believes that due to the second wave of COVID-19, tight restrictions, and uncertainty around Brexit, the 2020 GDP will be 10.6% less than in 2019, which is a record drop. Add to this the risk of a no- deal Brexit, and as a result we can expect that the REPO rate will drop below zero and the British pound’s rate will be more likely to fall. Most likely, not to $1.25, as Bloomberg experts anticipate. In my opinion, we need make allowance for the US dollar weakness and start buying [GBPUSD][1] from the $1.28-1.29 zone.

In the case of a successful Brexit, the pound expects completely different consequences. Thanks to rapid vaccinations, the UK could become the first country to cope with the pandemic. That will boost economic activity, stimulate GDP growth and capital inflows, and strengthen the national currency. It makes sense for traders to think about buying [GBPUSD][1] on the breakout of resistances at 1.35 and 1.3525. The potential of the pair’s northern march looks impressive. If the bet on the global economy’s rapid recovery and the global risk appetite’s increase wins, the GBPUSD can reach the level of $1.4 as early as in 2021.

Price chart of GBPUSD in real time mode

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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