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Why the recent strength of the Pound may be an aberration

The British pound (GBP) has endured something of a roller-coaster during the last nine months, after sinking to a 31-year low in the immediate aftermath of the EU referendum (and again in October following Theresa May’s confirmation that she would pursue a hard Brexit).

While the GBP has rebounded from these record lows, however, it has continued to trade within a narrow range since the beginning of the year, while struggling to make any gains any the resurgent U.S. Dollar (USD). This was a trend that began to show signs of reversal towards the end of the first financial quarter, with GBP threatening to make significant gains against the USD.

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The Reversal of the GBP/USD Decline: A Sign of the Times?

The GBP/USD pairing first began to rouse amid bearish intra-day trading at the start of March, after the RSI Oscillator began to enter oversold territory. According to analysis by Steven Knight at Blackwell Global, this was evidence that the continued decline of this pairing had most likely run its course at the beginning of the month, particularly as the price action had also entered an historical reversal and liquidity zone. With many economists also predicting the release of positive data-sets in the weeks ahead, GBP/USD looked set to emerge from a narrow trading range and showcase renewed resilience ahead of the decision to trigger Article 50.

 

Is the Recent Strength of the GBP Little More Than an Aberration?

While there were signs that the currency had reached the limits of its decline at the beginning of March as it began to make initial gains, however, there remain genuine concerns that such resilience can be sustained once the government chooses to trigger Article 50 and enter into negotiations with the EU. These were further exacerbated by the surprisingly disappointing UK Construction and Services PMI data from February, which produced a reading of 53.3 and came in far lower than the original experts forecasts of 54.1.

This caused the GBP/USD to slip once again, while it also highlighted the fragility of the currencies recovery in both the short and the longer term.

In short, this seemed to confirm that the UK-specific risks associated with Brexit and the triggering of Article 50 (which is now scheduled to take place on 29th March) should be used to place any short-term gains or peaks for the pound into context. More specifically, these short squeezes are likely to amount to little more than temporary aberrations that occur as the currency embarks on a downward trajectory. After all, the GBP is likely to decline further once the UK confirms its intention to leave the EU, while it may enter an even narrower trading range if Brussels decides to adopt a hard-line stance with the Brits.

 

The Last Word: Don’t Forget the Lure of the Dollar

With the GBP flailing and seemingly destined to endure a downward trajectory in the near-term, it is also important to consider its performance against USD. The greenback has thrived in recent times, and while its long-term health remains in doubt given President’s Trump desire to increase the competitiveness of U.S. exports, it enjoyed a further growth recently as the White House moved towards a final decision on the so-called ‘Trumpcare’ bill.

So as the USD continues to make gains against the GBP and the Euro (EUR), the pound must content itself with occasional peaks and interim shows of strength that defy on overall trend.

 

Andre Jackson
A freelance business and finance writer based in the UK. Discusses political movements which affect the financial markets.

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