Pound: Is it time to reach the bottom?

By | May 15, 2020
InstaForex
Pound: Is it time to reach the bottom?
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The conflicting dynamics of the British currency from time to time confuses the market. A little earlier, the pound was gaining impulse confidently, but now it is sliding at the same pace. Experts fear that the pound will reach the bottom, and it will not have the strength to move.

Analysts agree that the “British” currency still demonstrates the deepest drawdown among the currencies of developed countries. According to experts, many market indicators indicate that the worst for the pound is yet to come. Moreover, technical indicators on the charts along with the cost of options reflect the ever-increasing risk for the British currency. The chart, presented by analysts at Bloomberg, shows a figure called the “double top”, which clearly signals the risk of a further decline of the GBP/USD pair. Based on technical analysis, the pound has already violated the so-called foundation line with the low closing price recorded at the previous session. According to experts, the nearest projected target could be the area from 1.1800 to 1.1900. Therefore, it is believed by the analysts that the pound may test the support levels around the $1.1850 mark in the near future.

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By the end of this week, the pound approached in a minor mood, showing a clear downward trend. This morning, the GBP/USD pair began quite cheerfully, remaining within the range 1.2212 – 1.2213. However, the strength of the pair ran out. Later, the GBP/USD pair headed down to the levels of 1.2206 – 1.2207. It can be noted that the pound declined by more than 3% last month, and its losses strengthened more this week. Experts believe that the reason for this is a sharp decline in macroeconomic data, indicating that the British economy could fall into a deep hole in the recession, the most intense over the past 300 years. And they emphasized that the situation is complicated by a prolonged and debilitating pandemic of the COVID-19 pandemic.

Current negative factors significantly weaken the pound. The British currency was also supported by recent economic reports released on Wednesday, May 13. Despite the relatively positive background of these releases, they were unable to mask the deafening recession of the British economy. Experts fear a further worsening of the situation, since current data mainly reflect the economic picture of March, and the height of the COVID-19 pandemic in the UK fell in April 2020. Consequently, analysts are sure that new reports will be much worse, and the market should prepare for the next anti-records.

According to experts, the “red” zone has covered almost the entire British economy. The growth of negative trends causes serious concerns of market participants. In addition, based on the reports, the country’s GDP slipped by 2% on a quarterly basis and by 1.6% on an annualized basis in the first quarter of 2020. According to experts, the absolute decline in UK GDP over the reporting period was -7.7%, which is the most powerful decline since 2008, that is, since the global financial crisis.

Experts draw attention to the sharp decline in British consumer spending by 1.7% compared with the previous quarter. Analysts note again that the last time such a failure was recorded at the end of 2008. In a state of shock, the market plunged the indicator of industrial production in the UK, which almost reached the bottom. According to the report, in March it hit 4.2%, which is the maximum drop since January 1971.

At the beginning of this month, the April PMI for the country’s manufacturing sector was published. In March 2020, it amounted to 47.8 points, but it was revised to a critical minimum of 36.6 points in April. However, shocking news for the market was the data on the PMI index for the UK services sector. Last month, it fell with a deafening crash to 13.4 points. Experts unanimously consider this a plummeting to the bottom. It can be recalled that the indicator was 34.5 points in March 2020, and a value below 50 points is critical for business activity.

The total weakening of the British currency is caused not only by economic, but also by political factors. One of them is the “hanging” question about Britain’s exit from the EU. To date, negotiations between London and Brussels have been paused, but before the pandemic, they also did not lead to a positive result. The parties could not reach a mutually beneficial compromise, so the “soft” Brexit is postponed indefinitely. Experts do not exclude the “hard” option for the country to exit the Eurobloc, which does not add optimism to the British currency. The combination of a number of negative fundamental factors exerts strong pressure on the GBP, which will continue in the near future.

According to economists, the rapidly falling pound may lie at the bottom, however, it will be much more difficult for it to rise from the depths than just push off and move quickly upwards. Now, experts expect the pound to take decisive action, although they warn that the decline in the British economy will be much stronger than ever in the second quarter of 2020, and it will not be possible to return to pre-crisis levels until 2022. Against this background, the national currency will have to actively move around to stay on the surface, and there is no discussion about the increase yet, analysts sum up.

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