While this week has seen a recovery in the GBP against the USD in the forex markets, mostly due to a temporary USD currency weakness based on a recovery in oil and on conflicting expectations regarding the Fed’s and the ECB’s next moves, the truth is that the GBP/USD is likely to see some pain in the next week.
First of all, the US employment data is supporting an environment that would make the Fed have to stick with its rate hike plan. While some board members of the Fed have suggested that raising rates again in the US, in March, would not be the right move for financial markets, the truth is that the US economy numbers seem to be aligning with the conditions that Janet Yellen originally stated for a progressive rate hike to move forward. And traders are paying attention – the USD is currently one of the largest net long positions in the foreign exchange markets.
Secondly, the temporary rally in the oil market, which is helping to create a temporary weakness in the USD, is mostly caused by a short squeeze and not by fundamentals. While OPEC members keep promising meetings that will ‘change it all’, with successive suggestions of production cuts, the fact of the matter is that not even the seemingly universal OPEC agreement of putting a cap on current production ended up holding ground – namely with Iraq and Iran not playing ball. Saudi Arabia is in a situation in which it needs to keep pumping to destroy the US shale industry, and bankruptcies in the oil sector, in the US, Canada and in other oil-producing countries, will likely push oil towards $20 instead of $40. Plus, if Libya manages to strike some kind of a peace and governability deal between all conflicting parties, some experts believe that oil can go down to $16.
This is all in favor of USD strength, also supported by speculations about the expected measures from Draghi, which are likely to help push the USD back to its bull market. Deflation in Europe, the European banking tensions, the anemic European economy and the refugee crisis are all reasons to be short the EUR. Plus, there’s also the yuan, with the likes of George Soros and Kyle Bass betting on a 30% devaluation of the CNY for this year, due to China’s immense banking system and the leverage it is exposed to.
In the middle of all this, the GBP is not only likely to be pressured by a strong USD and a weak EUR, but the momentum that the Brexit is gaining will keep adding to uncertainties as to how the UK economy will perform in such a scenario. The threat of the London City losing ground to Frankfurt when it comes to being Europe’s banking and financial center is only one of the currency pressures that the GBP is going to keep feeling. Financial markets do not like uncertainty, and the GBP is surrounded by nothing less than that.
This means that this is a good time to take advantage of the temporary GBP strength and USD weakness to seek forex value either by shorting GBP/USD or going long the USD/GBP.