With the end of the last month of spring and the start of the first month of summer, the British currency will begin a hot season. According to some analysts, the pound will face great difficulties in June. Experts expect that the British currency will respond adequately to the tests that fell to it.
According to experts, the current political and economic picture indicates an increase in turmoil for GBP, which will peak in June 2020. The British currency is one step away from another fall in the last four months, and this is not the limit. According to preliminary calculations, the first summer month will be a test of pound's strength. The British currency will face three crucial tests: the expiration of the Brexit-related transition period, the possible introduction of negative interest rates and the gradual exit of the British economy from the quarantine introduced due to the COVID-19 pandemic.
In connection with the mentioned above, experts do not promise calmness in the markets. On the contrary, they predict the highest volatility in the GBP/USD pair, which was not observed after the referendum in the UK in June 2016, when Brexit took effect. According to analysts, the problems associated with the exit of the United Kingdom from the European Union can greatly weaken the national economy and the domestic currency. Due to Brexit, the annual losses of the British economy reach an impressive hundreds of billions of pounds, and the absence of trade and general economic agreements with the EU keeps London in suspense. Negotiations with Brussels are still ongoing, however, most often they are inconclusive and do not lead to mutual agreements and concessions.
So far, three rounds of negotiations have been held between the parties, but nothing has been clarified in resolving key issues. It can be recalled that the transition period for Brexit ends at the end of 2020, therefore, the UK and the EU have little time to conclude a new trade deal that will be beneficial to both parties and will not require tariffs. However, according to analysts, London and Brussels will not be able to agree either by July 1 or December 31 of this year. The result of "stomping on the spot" will be a chaotic Brexit, although the minimum chances of extending the transition period still remain.
The current situation, along with quarantine measures introduced in the country amid the spread of COVID-19, undermines the position of the British currency. The UK is currently moving towards easing these restrictions. Experts do not rule out the gradual removal of quarantine throughout June and the confident recovery of the British economy. In the case of the implementation of this scenario, experts say that the pound is provided with a powerful upward impulse.
The pound may be on top In the medium-term, but you should not expect records from it in the near future. If we consider the British currency in a historical context, we can see that it has become cheaper in relation to the dollar since 2014. In the past three to four years, since the announcement of Brexit, the pound's decline has accelerated. Economists are worried about its short and long term prospects, which are far from bright. It can be noted that the pound declined 1.5% against the dollar in the current month. On Tuesday, May 26, it also slipped to $ 1.2340, having lost some of its achievements. On Wednesday morning, May 27, it was trading at 1.2312 - 1.2313. A little later, the GBP/USD pair went down a step lower, to 1.2295 - 1.2296.
Moreover, dull macro statistics worsened the situation. In the middle of this month, it was replenished with extremely weak reports for April 2020. Analysts emphasize that almost all indicators were in the negative zone. Macro statistics broke the record, as most of the key indicators fell to multi-year lows. For example, UK GDP declined by 2% on a quarterly basis and by 1.6% on an annualized basis, which is the largest collapse in the last 11 years.
Experts were also concerned about the record-breaking (by 4.2% mom) collapse of the industrial production indicator, which had not been recorded since January 1971. The April consumer price index (up to -0.2%) and the core inflation rate (up to 1.4%), which remained at a three-year low, continued to fall along the slope. Current macro-statistics did not add positivity to the pound, although they could not bring it down.
An additional factor of pressure on this currency may be the upcoming meeting of the Bank of England, scheduled for June 18. It is expected that it will solve the most important issue - to be or not to be negative interest rates in the UK. Experts emphasize that this problem is extremely relevant for the pound. Earlier, Andrew Bailey, the head of the regulator, said that the agency is actively working on this issue, while not excluding the introduction of negative rates.
Such information was the last straw that outweighed the scales of the British currency. It literally collapsed after such assumptions, similar in form to the statement, and still has not recovered. It can be recalled that two months ago, A. Bailey held the opposite point of view. He argued that the negative rate would have an extremely negative effect on the UK economy. As a result, a sharp reversal had the strongest pressure on the GBP/USD pair in general and the pound in particular. It updated her two-month low, soaring to 1.2070. Subsequently, the pair managed to find a balance, but the currency pair lost stable equilibrium for a long time.
Analysts, considering the prospects for sterling in the short term, came to the conclusion that they are relatively favorable. At the moment, the pound takes advantage of the weakness of the dollar who is getting cheaper amid a decline in anti-risk sentiment. However, the situation is different in the medium-term: the prospects for GBP balance from positive to extremely negative, depending on the situation on the market this summer. Yet, many experts do not share pessimism regarding the British currency, despite the extremely "bearish" mood prevailing in the market.
Experts believe that the main risk does not come from Brexit or negative rates, but from the institutional problems of the eurozone. In the meantime, the pound remains the only one of world currencies for which the Central Bank discount rate remains above zero. In the event of its decline, a tsunami of liquidity is expected, against which money pours into the debt market in a powerful stream. Experts are sure that the implementation of such a scenario will significantly support the pound.
