The turning point was September 3, when an intraday drop of almost 1% during the London session was actively bought back. It buyback resulted in an exchange rate jump by the at the end of the day and leading to an even more powerful surge the next day.
It is hardly possible to consider that it is all about the mysterious insiders or smart traders who calculated the chances of Boris Johnson to come round Parliament and getting out of the EU exactly on October 31, with or without a deal. In our opinion, the pound was oversold by that time so much that it just had no room for further decline. The most destructive scenario for the economy was, probably, already priced in the historically low exchange rate.
GBPUSD added about 5% to the lows in early September. As well as in 2016, drop to 1.20 increases impressive support from the pound buyers. Looking more closely at history, in 2016 and 2017, the pound initially faced difficulties in growing above 1.27. However, exceeding this level marked the beginning of an 18% rally that was more than a year long.
Behind this rally, one could see the economic and monetary reasons, which are quite relevant this time as well. The weakening of the currency spurred consumer activity. Financial markets are responding to the uncertainty surrounding Brexit with selling the British pound. Almost the same did ordinary people. They actively changing their pounds in pockets for goods, as seen in the surge in retail sales both in 2016 – after the referendum – and in the spring of 2019 – the initially planned date of Brexit.
This consumer activity subsequently supported prices and helped the economy to show impressive growth. At the same time, the Bank of England had no choice but to stay away for a longer time, ignoring inflation jump above its target. The main idea at the time was that an increase in interest rates would exacerbate the economic downturn and send the wrong signal to the financial markets.
Yesterday, we heard from BoE’s Mark Carney about disinflationary risks in the coming months. At the same time, retail sales and consumer inflation show more upside potential.
Ultimately, when the Brexit issue is resolved to some extent, the pound may become an even more attractive target for buying. The country’s central bank will have to turn towards fighting inflation and returning to the path of higher rates.
Shortly, the British currency’s rally should have an essential test near 1.27. In addition to the 3-years old rebound level, there is a 200-day average getting thought. It is often considered as a critical market indicator sentiment for big funds or banks. The dynamic above this line often strengthens the interest of buyers, which may well happen in late September. If the GBPUSD continues to climb, as it is now, the pair may rise to 1.31-1.32, while EURGBP may settle at 0.86-0.87. Moreover, one should not be surprised if we will see GBPUSD quotes above 1.42 even in the next year.
This article was written by FxPro
This article was originally posted on FX Empire
More From FXEMPIRE:
- GBP/JPY Weekly Price Forecast – British pound shows signs of exhaustion
- AUD/USD Weekly Price Forecast – Australian dollar breaks down for the week
- Gold Price Forecast – Gold market continues to grind sideways overall
- S&P 500 Weekly Price Forecast – Stock markets continue to reach towards the highs
- S&P 500 Price Forecast – Stock markets continue to test highs
- EUR/USD Weekly Price Forecast – Euro breaks down for the week to test big figure