The British pound has been in a strong upswing for weeks. At first glance, it’s hard to see what’s going on. When you first look at the long-term chart, you will notice: Now at 1.40 against the US dollar, the British pound is in full swing to compensate for the crash since the Brexit vote in June 2016 (from 1.48 it went down to 1.20 in January 2017). The biggest part of the crash would be almost balanced.
What happened last time regarding Brexit? For a long time it looked extremely hopeless around the Brexit negotiations. The British themselves didn´t know what to present to the EU in the negotiations. Recently, however, there has been great jerky progress, and now it can be assumed that UK will be allowed to trade with the EU’s internal market relatively unproblematically from 2019 onwards. This scenario helped the british pound in the last weeks.
Inflation in UK continues to blow through high import prices due to the weakening pound that has been going on for a long time since June 2016. Importers have to buy more expensive in USD. This inflation has to be defeated by the Bank of England with rising interest rates. We are already well above the maximum bearable level of inflation in UK, as everyone knows. The next decision of the central bankers will be made on February 8 as to whether the key interest rate will rise from 0.50% to 0.75%.
As a result of the government shutdown in the US and its announcement for days, the USD has weakened significantly in recent days, also against the pound. If one compares the exchange rate of pound vs. dollar with the development against the euro, then the pound against the dollar has been significantly stronger in the recent past. Thus, one can speak here above all of a dollar weakness, which the Pound has recently pushed vigorously.
It’s a real momentum, as traders call it. Good reasons reinforce a trend that eventually becomes independent. In the meantime, however, the British pound has almost gone too far and too well. If you look at this bullish trend against the USD, you could already think of a countermovement in the near future. This chart (since June 2017) shows the upward trend in the British Pound vs USD. For the last three weeks Cable (GBPUSD) was moving upwards from 1.35 to 1.40. Is it time for a countermovement, even if only for a short time from a technical point of view? The market is still in an upward rush, but recently it has been extremely steep! A certain correction seems quite likely, even if you can never predict it!
This chart below shows the major movement in the British pound (chart since early 2015), down from June 2016 with the brexite vote, and then the countermovement.