One thing is certainly clear in September and that is the strength of GBP, which is experiencing a resurgence in popularity. Not since before Brexit was confirmed has GBP reached such high levels. In this blog we are going to look at some of the underlying reasons for this and evaluate whether the trend will continue.
Some strong words from the UK—in particular, Boris Johnson, secretary of state for foreign affairs—have put Europe on the back foot in the negotiations, meaning a lower divorce bill, more access to the free market, and more controls on immigration. All of this is positive for a post-Brexit Britain and thus GBP strength.
UK Prime Minister Theresa May has managed to hold onto her position after the disastrous election results and keep her party in line with her Brexit agenda. So far there is not much to suggest the UK won’t get the Brexit it wants and at the same time there have been some minor concessions that have been enough to keep the rest of Europe at the negotiating table.
With Brexit comes opportunity and several global powers including the USA, Canada, Australia, and India have spoken strongly about new or improved trade deals with the UK. This has given a boost to British business and thus a boost to GBP.
Even though increases in house prices are slowing in the UK they are still increasing at a time when most economists proposed they would decline sharply as the result of Brexit. Because property attracts overseas investors who need to purchase GBP to purchase property, they are driving up the price of GBP.
Perhaps the most important factor in the latest increase in GBP is the recent hawkish comments from the Bank of England. With the economy appearing resilient to Brexit issues and consumer credit and inflation growing, the Bank of England is proposing to increase interest rates sooner than previously thought. Any increase in interest rates will be a positive factor for GBP and will lead to more investors buying and holding GBP for the improved interest rates, particularly compared to EUR and JPY. This should put downward pressure on EURGBP and upward pressure on GBPJPY.
Where to Now?
At the moment, there is a lack of negative news out of the UK that suggests a continuation upward for GBP. A move to 1.50 for GBPUSD—which would be a level seen before the Brexit referendum—is possible if there are no setbacks to Brexit negotiations or UK economic output. Though the saying is “the trend is your friend” and there is definitely an upward trend, the key risks will be a breakdown of the Brexit negotiations or a breakdown in positive economic outlook. Either could provide a sharp shock to the downside and traders would be well advised to recall the events of the “GBP Flash Crash” of October last year.
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