Sun

Mr. SUN Yu (Elic) VP Client Relations China - Manages Chinese business relations for the brand. Elic provides market commentary for well-known media in China, including: People.cn, Financial News and China Finance Information Network. Elic serves as a special guest analyst on the CCTV Financial Channel to provide real-time analysis on the foreign exchange market.

The British pound reached a significant milestone in May by rising above 1.30 USD for the first time in eight months. This has traders asking, how far can it go?

 

The British pound from an analytical point – How Much Higher Can the British Pound Go?

According to technical and fundamental analysis, the GBP/USD exchange rate may not have much room to grow. After peaking at 1.3038 on 19 May, the pair has struggled to regain momentum. Several failed attempts to push through the 1.30 level suggests the bulls are struggling to justify the next leg higher. In the interim, cable has settled in the mid-1.29 region.

The British pound’s recent uptrend has been attributed to many factors, not the least of which is a low U.S. dollar. The dollar index, a broad performance measure of the greenback against a basket of six major currencies, was trading at seven-and-a-half month lows. Though the dollar isn’t expected to rebound anytime soon, broad economic and political forces may keep the GBP/USD from extending its recent string of good fortune.

 

The British pound from a political point

For starters, the United Kingdom is bracing for a snap election on 8 June. Until that hurdle is cleared, markets will likely remain in limbo. At the time of writing, Prime Minister Theresa May is expected to gain a stronger majority in the House of Commons, strengthening her party’s hand as it embarks on a ‘hard Brexit’.[1]

For the British pound, that’s when the true test begins.

The British pound plunged to multi-decade lows in the wake of the Brexit referendum. As they push for a hard Brexit, the GBP/USD is likely to go in the opposite direction.

 

The British Pound and economic indicators

Against this backdrop is the prospect of weaker economic growth. That was clearly on display Thursday after the Office for National Statistics (ONS) revised its estimate of first-quarter growth to 0.2% from 0.3%. On an annualized basis, the economy expanded just 0.7%, down from an earlier estimate of 1.2%.

The ONS attributed the weakness to consumer spending, which grew less than previously estimated. Trade also hampered growth, with imports outpacing exports.[2]

 

Weakness in the broader economy may put more pressure on the Bank of England (BOE) to ease monetary policy to the detriment of the pound. The central bank has stated repeatedly it is prepared to lower interest rates even further to accommodate growth. The BOE responded swiftly after the Brexit vote by lowering interest rates to record lows and expanding the size of its stimulus program.

 

[1] Mike Smith, Josua Taylor and Dan Bloom (25 May, 2017). “UK general election 2017 poll tracker: All the latest results as Conservatives battle Labour.” The Mirror.

[2] Jason Douglas (25 May, 2017). “U.K. first-quarter GDP growth revised down to 0.2%.” Market Watch.

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