Pound Price Forecast as of December 29, 2020

2020-12-29

Pound dreams about Singapore. Forecast as of 29.12.2020Dmitri Demidenko

The agreement with the EU opens up new prospects for the UK. Britain can enter into contracts on its own behalf and count on capital inflows to the local securities market. What does this mean for [GBPUSD][1]? Let us discuss this topic and make up a trading plan.

Fundamental pound forecast for a year

The euphoria over the successful Brexit dissipated like a morning fog, while the thin post-Christmas market and traders’ desire to take profit from the longs sent [GBPUSD][1] quotes to the bottom of figure 34. One can only guess how the story would have ended for the pound if London and Brussels had not come to an agreement in the end. However, in reality, they simply had no other choice.

The loss of the European market, which accounts for about 43% of UK exports and 52% of imports, would be a real disaster for the British economy and another blow to Boris Johnson’s reputation. His non- recognition of COVID-19 turned into the worst recession for the country in three hundred years. It must be said that the Prime Minister began to improve. He organized the world’s first large-scale vaccination against coronavirus and achieved a successful Brexit. This is favorable for the pound’s long-term outlook, but while traders are weighing the terms of the agreement with the EU, it is under pressure.

The Office for Budget Responsibility predicts that the UK economy will fall by 4% within 15 years, even if the country maintains access to the single market. Indeed, London and Brussels have agreed on duty-free trade in goods. Still, about 80% of Britain’s GDP is in the service sector, which is likely to experience problems due to restrictions related to the people’s movement across borders.

UK GDP Forecasts

Source: Bloomberg.

Brexit advocates, by contrast, are optimistic. They are confident that Boris Johnson will be able to recreate Singapore’s economic model in the UK. London will strengthen its position as an international financial center, which will be greatly facilitated by the inflow of capital into the British securities market. Indeed, since the 2016 referendum, local stock indices have been losing ground to their global counterparts and now look undervalued. Given the growing global risk appetite in 2021, the UK assets should be more demanded by foreign investors.

Dynamics of world stock indices

Source: Bloomberg.

Reduction of uncertainty, as well as hopes for additional fiscal stimulus from the US Congress, rumors of which will continue to support the [S&P 500][2] rally, will help to recover the [GBPUSD][1] uptrend. The main risk factor for the pound in the first half of 2021 is a potential referendum on Scottish independence.

[GBPUSD][3] trading plan for a year

Most likely, the second half of the next year will not be as successful for the GBPUSD bulls as the first one. I associate this with the change in the Fed’s outlook. By that time, the US economy, thanks to massive fiscal stimulus, should start expanding, and inflation should rise. This will force the Fed to change its views. It is one thing to talk about holding rates for a long time when the economy is just recovering from a recession, and another thing when it is growing at an extraordinary pace. Thus, by the end of June, [GBPUSD][1] quotes may rise to 1.4-1.42, but the pound risks to end the year at $1.37-1.39.

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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