USD/GBP Analysis and Forecast

This report analyzes the factors impacting USD/GBP and provides a forecast for the next 6 months. It discusses the historical data, including the impact of Brexit and interest rates, and predicts a continued rise in USD/GBP.

USD/GBP
Figure 1: USD/GBP Chart (March 2019- September 2019)
Objectives
The given report aims to analyze the key factors which have impacted the USD/GBP over
the last 6 months and thereby forecast the possible market conditions during the upcoming 6
months. Based on this understanding of the market, suitable trading strategies ought to be
implemented.
Historical Data of USD/GBP
On March 13 2019, the USD/GBP was trading at 0.750. However, by the end of March, this
had increased to 0.765. From May 1, 2019 to July 31, 2019, there was a significant uptrend
in USD/GBP which may be reflected from the jump in USD/GBP pair from 0.77 to 0.823.
One of the key reasons contributing to this increase was the robust growth in US economy
along with stable interest rates. Additionally, there was the ongoing trade war between US –
China which further casted doubts on the global growth and thereby increased the tendency
of global investors to look at USD as a safe haven driven by the robust economic data
emerging from the US. On the other hand, situation in UK cannot be worst. This could be
primarily attributed to the uncertainty around Brexit and the impact that it would have on the
UK economy (Partington, 2019). The GDP growth as a result suffered as indicated below.

Figure 2: Comparison of GDP Growth Rate for USA and UK
Owing to the uncertainty around Brexit and whether the government would be able to secure
a deal with the EU, the GBP became a risky currency which further led to increased demand
of the greenback and led to uptrend in USD/GBP.
Another factor that can be used to explain the appreciation of USD against GBP is the rising
interest rate in the US while the interest rates in UK have remained constant during the
above period. This is highlighted below.
Figure 2: Comparison of Interest rate for USA and UK
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The interest rate in US is significantly higher in comparison to UK which would tend to be
responsible for additional foreign fund flow especially in debt funds. This would essentially
lead to appreciation of USD against other currencies such as GBP.
The significant fluctuations seen in the USD/GBP is mainly driven by the Brexit talks. During
May 2019, there were repeated attempts by Theresa May to ratify the agreement made with
EU but she failed. Eventually she had to resign which provided a reason to cheer as it meant
that no-deal Brexit was not possible (Knapman, 2019). However, the new leader Johnson
has also found the negotiations tough and has not been able to secure any deal. Further, in
the last month or so there have been developments which indicate that the deadline for
Brexit would be again shifted thereby indicating that no deal Brexit is effectively off the table.
This has led the GBP to jump as a no-deal Brexit would lead to a severe slowdown in the UK
economy (BBC, 2019).
Forecast for next 6 months
In the future, I expect that the rise in USD/GBP would be continued. This is primarily
contingent on the assumption that a deal with EU over Brexit would not be secured till
October 31 and there would be extension of deadline of Brexit. Considering the current
position of Boris Johnson (British PM), it seems virtually impossible that a deal with EU
would be sealed anytime soon (Kraemer, 2019). As a result, the hangover for GBP would
continue whereby the upside for GBP against USD would be essentially capped.
Additionally, any failure to secure any extension for Brexit would be disastrous for GBP
leading to a sharp surge in USD/GBP pair.
Another factor which is likely to support the rise in USD/GBP pair is the worsening of the US-
China trade wars in the last month or so. With the US elections scheduled next year, Trump
might continue his strong arm tactics against China especially as the Fed may extend
support to ailing growth. This is likely to be a dampener for global growth leading to further
increase in demand of the greenback as a safe haven (Economist, 2019). Some relief to the
GBP might stem from the fact that in the near future, the Fed is expected to deliver rate cuts
while Bank of England may hold the rates steady since they are already at historical low
level (Shilling, 2019).
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Figure 4: Expectations for rate cut till December 31, 2019
Source: https://www.bankrate.com/surveys/economic-indicator-survey-september-2019/
It is my understanding that if the deadline for Brexit is not extended and a no deal Brexit
does take place, then USD/GBP pair may be trading in the range of 0.92 -0.95. On the other
hand, extension of the deadline would lead to a potential range of 0.83 -0.86 for the
USD/GBP. As a trader, I would be long on USD/GBP pair unless there is a major
development like trade deal between US China, UK –EU Brexit deal or UK opting out of
Brexit. The following table summarises the estimates for the next 6 months.
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References
BBC (2019), Pound climbs to highest level since July, [online] Available at
https://www.bbc.com/news/business-49687380 [Accessed September 19, 2019]
Economist (2019), The escalating trade war will deepen global gloom, [online] Available at
https://www.ft.com/content/ca61104e-cf2e-11e9-99a4-b5ded7a7fe3f [Accessed September
19, 2019]
Knapman, H. (2019), NO POUNDING! Pound leaps against euro and dollar as Theresa May
quits as PM but it’s now come crashing down, [online] Available at
https://www.thesun.co.uk/money/9144978/pound-rises-against-euro-and-dollar-as-theresa-
may-quits-as-pm/ [Accessed September 19, 2019]
Kraemer, D. (2019), Could a no-deal Brexit still happen on 31 October?, [online] Available at
https://www.bbc.com/news/uk-politics-49612757 [Accessed September 19, 2019]
Partington, R. (2019), How has Brexit vote affected the UK economy? August verdict, ,
[online] Available at https://www.theguardian.com/business/2019/aug/28/how-has-brexit-
vote-affected-the-uk-economy-august-verdict [Accessed September 19, 2019]
Shilling, G. (2019), Why The U.S. Will Win The China Trade War, [online] Available at
https://www.forbes.com/sites/investor/2019/08/12/why-us-will-win-china-trade-war/
#5f48e0cc4139 [Accessed September 19, 2019]
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