GBP at Risk: Three Factors That Could Slam Sterling
GBP put in a strong rally today, with the GBPUSD cross nearly breaking back above the 1.3000 mark and EURGBP is close to testing 0.9100 from overnight levels of around 0.9200, with the news that a deal has been reached between the UK government and the rebel Conservatives who had been planning on voting for the “Neil amendment”.
This amendment basically seeks to prevent further breaches of international law, amid EU and international consternation against the fact that the UK internal market bill, proposed by the UK government last week to maintain smooth trade with Northern Ireland in the event of a no deal, would break the Withdrawal Agreement signed between the EU and UK back in October 2019.
By the sounds of it, the UK government has agreed to give parliament more oversight over whether the government is able to break international law, but only beyond the breaches that the internal market bill already makes.
From the EU’s perspective, it still looks as though the UK is going to be breaking the treaty it signed with it last October regardless of what happens. For the EU, they want the bill gone and this “deal” between the government and parliament is unlikely to be good enough.
Talks on the future relationship still remain under threat, then, meaning GBP faces the risk of significant bouts of further downside before the end of the year.
2) Furlough unwind
Since March, the UK government has been subsidising the wages (up to 80% until August and then up to 60% this month) of those who have been unable to work due to the Covid-19 virus. The idea was to essentially pay peoples wages instead of leaving the cost up to closed businesses in order to avert mass layoffs (like we saw in the US).
The scheme has worked well; “just” 700k people have lost work in the UK since March (according to July/August labour market data).
However, given the high cost of the scheme, the UK government is unwinding furlough from this month. By October, the scheme will be gone. Mass unemployment is expected, with struggling businesses expected to lay workers off rather than paying their wages now that the government help has been withdrawn.
Thus, the economic recovery that has so far exceeded expectations is likely to falter; more unemployed people equals less spending on good and services after all, while the excess supply of labour puts downwards pressure on those lucky enough to still be in work.
Increasingly ugly jobs numbers between now and the end of the year are expected to weigh on GBP.
3) Bank of England
Given the above factors, most are expecting an increasingly dovish sounding BoE over the next two months. Indeed, a number of BoE members have already seemingly signalled concern that the bank’s economic forecasts released as recently as August might be overly optimistic (the BoE expects unemployment to hit 7.5% by the year’s end and for economic activity to be back at pre-Covid-19 levels by the end of 2021).
At tomorrow’s BoE meeting, many expect the bank to essentially “tee up” further stimulus. Most think this will come in the form of QE at the November meeting. This will likely not be too much of a surprise, and is unlikely to weigh to heavily on GBP.
But the BoE has explicitly left the prospect of negative rates on the table.
Say we do see unemployment rise closer to 10% than the BoE’s forecast. Say the UK does end the transition period on WTO trading terms with the EU.
Such an outcome would weigh heavily on the UK economy’s recovery from the Covid-19 pandemic. Under such circumstances, we could then see negative UK rates, and GBP come under even more pressure.
Our fundamental course, helps anyone understand them, all curriculum is very much fun, informative and packed with much energy. It will help you transition into an all-round trader, implementing fundamental and technicals to provide the edge when trading.