Will Sterling Weaken by the End of the Year? 

After the Bank of England policymakers warned that Britain’s economy could suffer more than it anticipated, the pound has drifted lower after hitting its eight-month high against the U.S. Dollar on Tuesday of over $1.34. 

A Reuters poll on Friday showed that Sterling will lose some of its recent gains against the Dollar due to the uncertainty in Brexit talks and fears surrounding the Coronavirus pandemic. 

Lockdown measures that are re-imposed in Europe due to high number of deaths from Covid-19 in Britain and to stop the further spreading of the virus also meant that the economy will contract a record of 20.4% in the last quarter. 

The level of Britain’s economic output would permanently be about 1.5 percentage points lower than it would have been without the pandemic, BoE Deputy Governor Dave Ramsden said on Wednesday and he warned the number could be higher. 

The central bank cut the borrowing costs to a record low and ramped up its bond purchases to support the economy. 

More than 60 foreign exchange strategists forecasted that the sterling would be trading at $1.31 in a month compared to $1.33 it was hovering near on Thursday it would be back at $1.34 in a year. 

“The UK is under pressure from all sides – Brexit, COVID-19 and structural capital outflows,” noted strategists at Jyske Bank. 

“However, GBP remains undervalued, UK equities are heavily underweighted, and our main scenario is ultimately a limited, 11th-hour trade agreement with the EU.” 

Besides trying to recover from the damage that the pandemic has caused to the economy, they also face the challenge of making a trade agreement with the European Union (EU) before a transition period following its departure from the bloc finished at the end of this year. 

“Despite the current standstill in negotiations, we think that a basic FTA is still narrowly the most likely scenario this autumn. We think it’s unrealistic to expect a sudden plunge in GDP once the transition period ends,” said James Smith at ING.   

TECHNICAL OUTLOOK 

In the daily charts of GBP/USD, the price tested its resistance level on 1.34 on Tuesday and closed with a strong pull back. The following day, the bears quickly came in and further pushed the price lower signaling a strong move by the dollar bulls. 

This resistance was also previously tested in December of 2019 and pulled back then rallied sideways all throughout the breakout of the pandemic in March which further pushed the price lower against the US dollar. 

The sterling bulls are now selling their positions on speculations that the same rally from December 2019 til the end of February 2020 may occur once again between the resistance at 1.34 and support at 1.27.  

Further analysis will be made on next weeks trading days for confirmation of a bearish trend of the pair. As the week closes on Friday, volatility seems to be in a standstill and traders are waiting on the sidelines for further confirmation. 

 

 

 

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