Trading The Cable: The GBP/USD Pair

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During November, the GBP was one of a handful of currencies that maintained pace with the USD. The uptrend that we saw with the GBP in November was remarkable. The GBP/USD pair declined just 0.91% over the past 1 month from November 22 through December 22, with its 5-day performance declining 0.82%. For the year to date, the depreciation has been sharp, with 16.46% declines. The GBP began consolidating around the 1.2460 level since early November, but it is starting to break lower and test current support levels. Unfortunately for the GBP, the Fed decided to act on December 14, 2016. The 25-basis point rate hike boosted the greenback and sent the GBP (and other currencies) into a tailspin. We now know that several additional rate hikes are expected in 2017, with the Fed promising 3, and Wall Street investors expecting at least 2. Hawkish sentiment at the Fed is definitely going to help strengthen the USD component of this pair and weaken the cable accordingly. The current support level at 1.2300 could be breached sooner, rather than later if current trends continue.

What to expect with the GBP/USD currency pair?

We know that the USD is bullish, at 14-year highs against major currencies. The big question is whether the greenback rally will continue unabated into 2017. If we’re looking to find USD reversal points, we have to take a position about whether the GBP is at a low against the USD? A slew of economic data releases will be made available towards the end of the year, and this will either drive USD strength, or tone down USD bullishness. A long position on the USD would probably best be served by trading the USD/JPY currency pair, not the GBP/USD pair.

Going short on the greenback could pay dividends with the cable by taking a long position on it over the short-term. Of course, the resilience of the GBP is its saving grace. Since the US presidential election, gains against the GBP have been muted. Real GDP growth in the UK could slow in 2017, and this will invariably lead to further quantitative easing by the Bank of England. Barring a wage rise, increased inflation would lead to domestic expenditure declines. This will have a contractionary effect on the UK economy.

Looking forward – will European politics play havoc on the GBP?

There are several reasons why the GBP is a prized currency and a notable major. One of these is the stance taken by the UK government vis-à-vis David Davis the Brexit Secretary. Suggestions are now being floated that the UK may contemplate contributions to the European Union budget to guarantee the most favorable deals in the single market area. This did a lot to alleviate the concerns about a hard Brexit and how that would affect the UK and European economies.

The Chancellor of the Exchequer, Philip Hammond has also echoed similar sentiment and this bodes well for those who are concerned about the costs of a hard Brexit. The GBP naturally reacts positively to this type of talk, as it generates less volatility for the UK economy. Nonetheless, the GBP has been the worst performing G10 currency for 2016. Uncertainty about the nature of Brexit negotiations remains a key sticking point. The European economy remains unstable given that there are elections in France, Germany, and the Netherlands in 2017. This could further affect the GBP during Q1 and Q2 of 2017.