GBP forex news in May: watch out for volatility as coronavirus and Brexit converge
The British pound (GBP) declined slightly against the US dollar in the first two months of the year as the market focused on the future relationship between the UK and the EU.
The currency declined to its lowest level since 1985 in March as the market started to worry about the coronavirus pandemic and the impact it would have on the UK economy. It then had a V-shaped recovery in mid-March after the Bank of England (BOE) announced its giant £200 billion quantitative easing program.
The British pound index has been relatively stable since April amid a slew of alarming economic data and news from the UK. Still, this calmness may be the calm before the storm for the currency.
GBP forex news: what has driven the value of GBP so far in 2020?
The UK is among the worst-affected countries by the coronavirus pandemic. According to Worldometer, the disease has infected more than 219,000 people, making it the fourth country in the world after the US, Spain and Russia. The number of deaths in the UK has risen to more than 31,000.
The country has been in a nationwide lockdown since late March; an aspect that has led to significant economic implications. According to Markit, the service PMI dropped to a record low of 13.4 in April as more people stayed at home. This number is important because, according to the ONS, the services sector is responsible for about 70 per cent of the country’s GDP.
In the same month, the construction and manufacturing PMI dropped to a record 8.2 and 32.6, respectively. Similarly, retail sales dropped by a record 5.1 per cent in March while consumer confidence has slipped to minus 33.
Analysts expect the upcoming numbers to be weak since most businesses were closed in April. For example, in its recent monetary policy meeting, the Bank of England (BOE) warned that the unemployment rate would jump to about 9 per cent from the current 4.0 per cent.
All these numbers suggest that the UK’s economy will likely slide to a recession this year. In a report released in April, the Office for Budget Responsibility (OBR), warned that the UK economy would drop by about 35 per cent between April and June. Similarly, in its report, the BOE warned that the economy would shrink by about 14 per cent this year, which will be the worst recession in decades.
British pound news before coronavirus was centred around Brexit. The UK left the European Union officially on January 31, 2020 and entered a transition period that will last until December 31, 2020. The plan is that the two sides should negotiate a trade deal that will be applicable from January 1 2021.
The challenge for the UK and in turn for GBP is that Boris Johnson has insisted that his administration will not seek an extension to the negotiations. According to the transition agreement, he has until June 30 to ask for this postponement. Therefore, without an extension, analysts are worried that the chances of a no-deal Brexit will rise.
Worse still, due to the coronavirus pandemic, the talks have been delayed and are currently taking place through video link. Undoubtedly, it might be rather challenging to hammer such a big deal without leaders meeting in person.
Up to now, the UK insisted on a Canada-style agreement that involves zero tariffs and quotas on most goods. The Canadian agreement also gives Canada the authority to set its standards. The EU has rejected this, saying that its geographical location makes it almost impossible to have such a deal.
Further differences between the two sides are about fisheries, the European Court of Justice, and competition.
Other recent GBP currency news came with the latest decision by the Bank of England (BOE) on interest rates and the plans to reopen the country.
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The latest GBP performance against its major peers: USD, EUR and AUD
Now that we have looked at the some of the GBP latest news, let’s review how the currency has performed against its main peers.
The GBP/USD pair declined slightly in the first two months of the year as Boris Johnson remained adamant about seeking an extension. The pair then dropped from 1.3096 to 1.1485 between March 8 and March 19 as the market started to worry about coronavirus. It has traded between 1.2626 and 1.2216 since April.
Learn what has been recently happening to this forex behemoth from a technical point of view and find out how to profit off the volatility by watching David Jones, chief market strategist at Capital.com, making his own GBP/USD technical analysis:
The EUR/GBP pair declined from 0.8462 in January to a YTD low of 0.8300 in February. The pair then jumped to 0.9425 on March 18. After the BOE intervened, the pair declined to a low of 0.8691. The most recent news on the pair was that many countries in the eurozone, including Germany and Spain, were starting to ease their lockdown restrictions. Another news was that members of the European Union were having differences on how to top up a recovery fund. In addition, a recent ruling by a German High Court on the legality of massive QE has also made headlines.
Finally, the GBP/AUD pair rose sharply in the first four months of the year. The initial gains happened because coronavirus was mostly spreading in China, which has a close relationship with Australia. During this period, the pair rose from about 1.9000 to a YTD high of 2.0673. The chart turned from April when the Australian dollar started soaring as the number of coronavirus cases began to drop. The AUD has also surged because China started to report relatively strong economic data, including a recent jump in exports.
GBP forex forecast: what to expect in the coming months
In the coming weeks, analysts will be watching four main GBP news stories. First, they will be looking forward to the next Bank of England (BOE) meeting, which will happen on June 18. This forum will be significant because analysts will be waiting to see whether the BOE will increase its quantitative easing program. In the previous meeting, two members of the board voted to increase the asset purchases by about £100 billion.
Secondly, the market will be looking at the upcoming data from the UK. This includes the March employment numbers, manufacturing production, industrial production, retail sales and inflation.
Thirdly, the market will be watching how the UK reopens and whether there will be a second wave of the coronavirus pandemic. Finally, and most importantly, they will be looking forward to the Brexit-related news. The pound is likely to soar if Johnson requests for more time to reach an agreement with the EU.
In the meantime, most speculators have shorted the currency, according to data from the CFTC. The latest Commitment of Traders (CoT) report showed that the net positioning of non-commercial players in the futures market fell to its lowest level this year as the speculators increased their short positions to 12,000, which is the highest level this year.
Similarly, analysts at Rabobank said that they were bearish on the pound due to the upcoming risks on QE and Brexit. They expect the GBP/USD pair to dip to 1.19 in the next three months.
According to an analysis by Long Forecast, the GBP/USD pair will be relatively volatile in the next few months. The forecast sees the pair ending the year at 1.196, which is a significant drop from the current 1.2410.
Another scientific analysis by Wallet Investor forecasts that the GBP/USD pair will end the year at about 1.2011, which implies a 3.2 per cent decline from the current level.
The bottom line on UK pound trading
In this article, we have looked at the latest GBP fx news and their implications on the market. We expect the currency to be relatively volatile in the next few months because of the convergence of the coronavirus pandemic and Brexit issues.