GBPUSD Outlook: 12/03/2017
(13:00 GMT)
LTP: 1.2170
Technical Outlook:
Looking at the chart,
immediate support for GBPUSD may be around 1.20-1.18 and only consecutive closing
below 1.18, it may further fall towards 1.12-1.10 in the near to mid-term
(under bear case scenario).
On the other side, for
any strength, GBPUSD has to sustain over 1.23-1.25 area for further rally
towards 1.28-1.32 & 1.36-1.40 zone the near to long term (under bullish
case scenario).
Fundamental Outlook:
Next
week may be vital for UK’s “official divorce process” from EU and also for the
GBPUSD. On 14th March, UK’s House of Commons (lower House of its
parliament) will vote for the EU citizen’s right in the UK issue, which was
amended by the House of Lords (upper house of the Parliament). If the House of
Commons reject this EU citizen amendment, then the UK Govt could invoke
Article-50 to initiate the formal separation process of UK from EU and being irreversible
in nature, then Brexit might be a reality by 2019 and one can expect a knee jerk
reaction of the GBPUSD & the pair may fall towards 1.18 area or even break
the same convincingly. Then, depending upon the whole Brexit negotiation
process & its uncertainties (soft or hard Brexit), coupled with actual Fed
stance on 15th March, it will shape its trajectory.
On
the other side, if House of Commons approve the EU citizen amendment proposed
by the House of Lords, it may further delay or complicate the overall Brexit
process and GBPUSD may also found some political support for the time being on
the hope of a “Soft Brexit” rather than a “Hard Brexit” and the pair (GBPUSD)
may also rally towards 1.25-1.28 area, depending upon the actual stance of Fed
next week.
But,
eventually, even a non-invocation of Article-50 because of “war of words”
between these House of Lords & Commons may eventually increase the overall
uncertainty about the whole Brexit process & the final shape of it
(negotiations, trade agreements, hard or soft Brexit etc), which is itself may
not be good for UK economy and the currency (GBP). Thus, it may be also very difficult
for GBPUSD to sustain above 1.28 area and in that scenario, depending upon the
actual Brexit process, it may gyrate between 1.28-1.18 zone in the near term.
There
may be another issue of Scotland, which is seeking a 2nd referendum
for its independence with UK under these circumstances of Brexit. This may also
further complicate the whole Brexit process itself. As par the latest report,
Scotland may also announce the referendum plan shortly and that may happen in
2018. Although, Scotland being a small part of UK economy, even its separation may
not affect the overall economic prospect of UK materially, it could disintegrate
other parts of UK and also EU and thus may also be negative for UK as also EU.
On
the other side, considering the tepid wage growth of US NFP and overall dovish
stance of US Govt/Trump to talk down the USD, Fed may be on “hawkish hold”
stance and may not hike on 15th March; but may deliver a “hawkish
script” for future multiple hikes. This coupled with a no-invocation of
Artcle-50 next week may also give some support for the GBPUSD.
Overall,
UK economic data for the last few months were mixed and for the first time, a
sign of stagflation may be emerging for the UK economy after Brexit led huge
currency devaluation. Since, Brexit referendum in June16, UK economy is
enjoying dual advantage of a devalued currency and access to trade in EZ, being
a part of the EU. But, policy makers of EU or Germany/France may not allow such
dual advantage indefinitely and UK has to choose one side of the coin (exit
from EU or be remain with EU). Germany may be the biggest loser of huge
devaluation of GBP (Brexit) as UK exports surged at the cost of Germany
(relative strength in EURGBP).
Thus,
top policy makers in EU may ensure that for UK, “Brexit is a Brexit” and there
is no concept like “soft of hard”; but for UK, it may be a hard Brexit.
Because, if EU officials looked soft in
it approach or negotiations with UK for the terms & conditions for this
real Brexit issue, it may encourage other nations or extreme right wing
nationalistic political parties to go for similar types of exit from EU and the
whole EU concept may be in question & EU
may also disintegrate.
In
the back drop of political uncertainty in UK, because of this Brexit issue, it
may lose its appeal as an investment destination, being the capital of EU
financial world; its financial services industry may be severely affected simply
because of this uncertainty.
Due
to devalued currency, UK may be also enjoying some export advantage, cheaper
goods & services in UK, lower property prices and also a surge in its
tourism industry. But at the same time, imported cost of goods & raw
materials may have surged and along with that, the recent strength in Oil
around $50-55 may have also contributed to its headline CPI and UK consumers
may be feeling the pinch of incrementally higher headline inflation and
subsequently consumer confidence & consumption may have also deteriorated.
This, coupled with prospect of a slower growth in the coming days (Pre/Post
Brexit), may drive the UK economy towards a condition like stagflation (higher
inflation & slower growth). In June’16 UK CPI was around 0.5%, which stands
around 1.8% in Jan’17 after a steady increase.
Overall,
for the last few months, UK’s economic data may be termed as mixed and wage
inflation may be also tepid. Thus, BOE is expected to be owlish (neither
hawkish nor dovish) with accommodative mode, considering the currency has
already devalued without any QQE effort by the Central Bank and Brexit referendum is itself acted as a
political tool for huge devaluation of its currency, which has ultimately benefited
UK economy contrary to the earlier perception of a “dooms day”. But, at the
same time, the benefit of a lower currency may be overshadowed by the concern
or uncertainty of a “Real Brexit” in the coming days.
The
pair (GBPUSD) may come to its past glory (1.40-1.50 level) as in the Pre-Brexit
period, only if UK abandon the Brexit process itself and decides to be remain with
EU. Although, it may sound funny at this stage, it’s not impossible either
until Article-50 is invocated; a no Brexit may be still technically possible
and that might be one of the biggest geo-political surprises of 2017.
Eventually,
trajectory of GBP may be more guided by UK & EU politics rather than
economics as in the case of EUR (EU geo-political tension) and also USD (US
politics/Govt policy for a fair value of its currency).
There
may be three scenarios for GBPUSD next week:
1. Article-50
invoked & Fed also hikes rate:
The pair may break 1.18 conclusively and may also fall towards 1.12-1.10 zone
in the near term.
2. Article-50
invoked & Fed not hikes rate: The
pair may hover around 1.18 zone and will move as par future course of Brexit
negotiations (hard or soft Brexit etc).
3. Article-50
not invoked & Fed also not hikes rate: The pair may not break the 1.20 zone and may also rally
towards 1.25-1.28 area in the near term.
As
of now, probability of the 3rd option may be greater than 1st
or 2nd option.
Analytical Charts: GBPUSD
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