The British currency rose by almost 5% at the beginning of 2019 against the US dollar, but in the next six months the pound lost ground and the GBP/USD pair fell below the key mark of 1.20 in September. Then the pound strengthened by more than 12%, noting the high since May 2018 in the first half of December (around $1.35) as a reaction to the Tories victory in the December 12 early parliamentary elections and on the expectation that the outcome of early voting will help solve the long-standing problem of ratifying the Brexit deal.
However, the GBP/USD momentum was quickly dying away as concerns about the disordered Brexit returned.
The pound rally stopped after British Prime Minister Boris Johnson announced his intention to pass a bill through the national Parliament, according to which London and Brussels will need to conclude a trade deal with the European Union in the coming months, and the extension of the transition period after 2020 will become illegal.
It should be recalled that Great Britain is about to leave the EU on January 31, 2020. At the same time, the country will remain in the single market and the EU customs union until December 31, 2020. Currently, the transition period can be extended by mutual agreement of the parties for up to two years. The amendment made by Johnson will not allow this, as a result of which complex negotiations will have to be held in a fairly short time.
EU authorities have already warned that, given the number of issues that will need to be addressed, ratification of the trade deal during the year seems unlikely.
Recent events have raised concerns that the United Kingdom will eventually exit the EU in accordance with WTO rules if the parties fail to conclude a trade agreement by the end of the year.
The recent drop in the pound fuels the market's belief that the Brexit problem has not yet been resolved and will continue to influence the British currency in the next few months.
In addition to the situation with Brexit, the focus will remain on macroeconomic indicators in the UK. Recent data show that the country's economic growth is still slowing, and if the situation continues to worsen, this can provide food for talk about a lower interest rate by the Bank of England and increase pressure on the pound.
At the end of the December meeting, the regulator revised downward the estimate of national GDP growth in the fourth quarter of 2019 from 0.2% to 0.1%, although it predicted an acceleration of economic growth in early 2020. At the same time, the BoE warned that if the growth of the global economy cannot stabilize or the uncertainty associated with Brexit remains high, it may be necessary to support the national economy and inflation through monetary policy.
"Now the attention of market participants should switch to the British economy, and here not everything looks positive. Uncertainty regarding the future trade relations between Great Britain and the EU remains high. It's hard to predict what the opportunities for economic growth in the United Kingdom in 2020 will be against this background," said Brown Brothers Harriman experts.
They predict that the pound against the US dollar could fall to $1.28 in the first quarter of 2020 and drop to $1.25 by the middle of the year.
It is estimated that British economic growth could accelerate in 2020 if local companies and investors feel more confident about the future. Moreover, Johnson promised to significantly increase government spending in the next five years, which will give the economy an additional incentive. The BoE has already said that a gradual increase in the interest rate may be required if the risks to the national economy do not materialize and the situation develops in accordance with forecasts. This will support the pound.
Standard Chartered expects the GBP/USD pair to rise to 1.38 by the end of the third quarter and finish 2020 at 1.40.
"Political incentives do not support the idea of destroying the economy, so investor concern about the risk associated with Brexit should be reduced," said bank expert Steve Englander.
"Ahead of the British currency will be increased volatility, but nevertheless, the pound will add to the price, since there is no reason to expect its collapse due to the lack of political will to resolve the situation," he added.
