Has ‘Reopening’, ‘Brexit’ and ‘Tapering’ closed the doors for recovery in pound?

Pingdemic post reopening, disagreement post Brexit deal and US Tapering on record inflation could set an alarming situation for the Pound. After topping out near 1.40 levels in last week of June, the GBPUSD pair managed to continue its bearish movement to test our short term target of 1.3680, as suggested in our report dated June 22, 2021.

The WHO identified “variants of concern” to signify strains that possess additional risks to public health. These variants are assigned with letters from the Greek alphabet for identification- Alpha, Beta, Gamma, and Delta. The first three were not much widely known or impacted the world. But the last one, Delta, which was first identified in India, is creating a cause of concern for the world. The UK economy which was having 0 death and just 3,000 odd cases per day on 1st June, is now having cases more than 30,000 cases per day. On reopening day-19th July, UK lifted all the COVID restrictions and opened clubs, pubs and restaurants to their full capacity and remarked that day as a ‘Freedom Day’.

But as the restrictions are eased, some fear that a “Pingdemic” could lead to “chaos”. Yes, you have correctly read that word- Pingdemic. This word is made up of the terms “Ping” and “Pandemic” ”. It suggests that you will be notified by the NHS Covid-19 app on your phone when you come to close contact with someone who has tested positive with Covid-19. Those who are pinged with a risk will have to isolate for 10 days. Through this system more than half a million were pinged by the app in first week of July.

The erratic surge in the COVID cases is forcing hundreds of thousands of workers to stay at home under quarantine, causing shortages of food and gasoline and disturbing supply chain that was already grappled with Brexit.

Another factor that weighed on sterling is the Brexit saga. Since last month’s G7 summit- that was turned out to be the ‘Brexit Summit’, the tussle seems increasing day by day. Just seven months after the agreement, PM Boris Johnson is now demanding all customs checks on goods entering Northern Ireland to be removed.

On this proposal, Brussels said “Big No!” If UK continues with the protocol, then they will have economic and political consequences. The possible roadmap ahead could be disagreement. Then in that case either party can suspend the Protocol using Article 16 and the crisis would be back to square one. The only solution to any fight of clash is the “Common” solution where both end up having a win-win situation. Both EU and UK needs to realise the seriousness of the ongoing situation and be ready for the happy talk. Or else, we could see both currencies coming under heavy stress against USD.

Last but not least, the Fed’s hawkish tone which could burn the fire in on-going situation. Not just yield differential which favours USD, but other differentials like COVID cases, death rate or vaccine differentials between the countries also favours the USD. Additionally, Fed who had made up their mind to think on ‘think of tapering’ during their June meet is scheduled to announce their stance on policy this Wednesday. However, until next month’s Jackson Hole or probably in September meet, FOMC is not expected to trigger the tapering gun. But whenever they will lift off the support system, DM and EM both FX will experience sell-off against USD. On the given outlook of the US and Fed, we are expecting that 10 year yield to repeat 2013 like move and head towards 2.2 percent to 3.0 percent in just matter of 3-4 months. Furthermore, recently released CFTC report suggests that speculators have added longs to the highest level since late May 2020. These all definitely favours US DXY to jump higher towards 94.30-94.70 over the short term and 96.00 over the medium term.

Technical setup for the GBPUSD

The below weekly chart of GBPUSD suggest that after taking support near cluster of points like lower Bollinger band and 23.6 percent retracement levels, the pair is showing some retracement on the upside. However, middle line of the Bollinger band (20 DMA) near 1.3910 will continue to act as a key resistance levels. Overall, we expect that the pair should have limited upside upto 1.3910-1.3950 zone and unfold its downside momentum towards previous low of 1.3580 & 1.3520 over short term and upto 1.3380 over medium term.

Outlook:

Broadly speaking, higher fundamental regression factors like rising COVID cases, Brexit uncertainty and sluggish UK’s domestic economic outlook could pressurize BoE to delay on their bond tapering. Further, Fed’s tapering announcement could create panic sell-off in the Pound. Along with these, technical set up is also suggesting a bearish biasness on the pair. Hence, we are expecting that GBPUSD pair has limited room for the upside upto 1.3910 to 1.3950 zone and could fall towards 1.3580 to 1.3520 over short term with 1 month time horizon and 1.3380 over medium term with 1 to 3 months’ time horizon.

—Amit Pabari is the managing director of CR Forex Advisors. Views expressed are personal.