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Brexit was not enough for Pound. Forecast as of 05.05.2021

Following Brexit, the UK could face Scexit. Cutting off economic ties with Scotland could weigh on the sterling. Let us discuss the Forex outlook and make up a GBPUSD trading plan.

Weekly GBPUSD fundamental forecast

The pound is quite responsive to politics. In 2014, the sterling was being rocked by talks about Scotland’s independence; Brexit was pressing the GBP down from 2016 till 2020. Now, a new suggested referendum on Scotland independence sets back the GBPUSD bulls. One thing is to withdraw from a union created in the 1970s; another matter is when the union has existed since the 1700s. However, the GBPUSD is rising despite the growing risks of the Scottish National Party’s victory in the elections on May 6. The sterling is supported by monetary policy.

Most Bloomberg experts do not expect any changes from the Bank of England at the April MPC meeting, suggesting the BOE interest rate should remain at 0.1%, and the QE target of £150 billion should remain in 2021. However, BofA Merrill Lynch, Credit Suisse, ING, and Mizuho predict that the regulator will report a change in the weekly pace of asset purchases down from the current £4.4 billion. If it does not, the quantitative easing program will be exhausted by the beginning of November. It makes no sense to boost the QE amid rapid vaccination and the opening of the UK economy.

Dynamics of weekly pace of UK QE

  

Source: Bloomberg

The GBPUSD bulls are inspired by the example of the Bank of Canada, which supported the Canadian dollar strengthening by the announcement of the Canadian QE tapering. However, reducing the QE weekly pace without changing the total amount of the quantitative easing program is not the same case as in Canada. This is a less significant growth driver for the sterling than the gradual finishing of the QE.

As for the Scotland independence referendum, it may not occur at all. First, this requires that the nationalists win 80 out of 129 seats in parliamentary elections. Second, Prime Minister Boris Johnson is threatening to block the application. He understands what results could yield the Scexit. There are different sorts of investors’ concerns associated with Scexit, from a new recession to a 10% sterling drop. The situation is fueled by banks. Credit Agricole recommends selling the GBPUSD amid political risks; Barclays suggests buying the EURGBP amid the increased volatility ahead of the elections.

After all, even if the Scottish National Party manages to implement the idea of a popular vote for independence, the referendum will not take place until 2024. Citi estimates Scexit’s risks at 35% over the next 10 years. It is too long a period to influence the sterling exchange rate immediately.

I believe the GBPUSD trend will still depend on the BoE monetary policy in the short term. Hawkish actions of the Bank of England, including the improvement of forecasts for GDP and inflation and a reduction in the weekly pace of asset purchases under the QE, could send the pound up above $1.39. The matter is whether the sterling will consolidate above this level if the Treasury yields surge amid strong US jobs report.

Weekly GBPUSD trading plan

The pound may soon be jumping up and down. Therefore, it is relevant to hold GBPUSD longs entered at level 1.3835 and add up if the price breaks out the resistance at 1.3925. If bulls fail to consolidate above this level, it could be a reason to sell the pair.

   

Price chart of GBPUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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