The strengthening of the British Pound exerted severe pressure on the US Dollar. In its turn, the weakening of the US Dollar pushed gold prices higher. Still, despite the negative correlation between the US currency and gold, the latter keeps lagging behind other precious metals (including silver and platinum) in terms of profitability.
What is the current tendency in the market of GBPUSD and how to benefit from it? Masterforex-V Academy experts are going to share their tips with us in this article.
GBPUSD Sets Major Economic Trends
Over the last few months, the British Pound has shown considerable growth. Will this tendency continue in the near future? In order to answer this question, it i necessary to evaluate multiple factors to see the overall picture.
1. GDP. The UK GDP growth remained unchanged in Q4 2013. The official forecast is the same as well:
The other day, the IMF published its report, which contained a lot of revised figures for multiple countries. In particular, the expected UK GDP figures were upgraded. The IMF expects the British GDP to gain some 2,9% this year. The figures are up by 0,5%. If to compare these figures with those seen last year, we can clearly see a sound increase.
On top of that, the IMF expects the UK to become the fastest-growing economy among G7 in 2014. Undoubtedly, the economic growth in Great Britain coupled with positive revisions will support the British Pound.
2. Unemployment. The high rate of unemployment we are currently seeing around the globe is clearly one of the key economic problems and deterrents for the global economy in general nd national economies in particular. As for the Uk rate of unemployment, it is still relatively high. Still, the forecasts are positive. They indicate a faster pace at which the rate of unemployment is expected to be declining in the near future. The official unemployment forecast for 2014 is 6,6%, which is below 6,7% and far below 7,2% seen in 2013. The forecast for 2015 remains unchanged at 6,2%.
3. Inflation. Inflation is one of the key indicators, which set trends in monetary policies.
If inflation is high and is set to go higher, it is wise to anticipate tougher monetary policies. In the case with the UK, we can see that despite a growing economy, the rate of inflation is within acceptable levels. Moreover, the latest forecasts predict a slight decline down to 2,0%.
February's inflation figures are 1,7% versus 1,9% in January. These values are within the expected range. The retail sales volume increased by 3,7% y/y and 1,7% m/m:
4. Trade Balance. Trade balance figures are also very important in terms of influencing currency exchange rates. A surplus usually supports the national currency while a deficit presses it. At this point, the UK trade balance figures are fluctuating close to the average. The deficit slightly increased at the expense of lower exports and higher imports. This issue was taken into account by the UK financial authorities, who assume that a much stronger national currency will hinder the reduction of the deficit. Therefore, the authorities are determined to curb the strengthening of the British Pound.
6. Balance of Payments. Along with trade balance figures, the balance of payments also influences the national currency. As for the UK, the situation with its balance of payments leaves much to be desired. The deficit has been around the highest levels over the last 2 quarters.
As usual, there are 2 sides of 1 coin:
Firstly, higher deficit along with other microeconomic indicators hint at a stronger economy since domestic consumption grows along with living standards. Secondly, this may expert extra pressure on the economy in the long run, thereby curbing its growth.
One of the reasons why the UK balance of payments is currently seeing a wider deficit has a lot to do with investments. The UK pays more than receives from outside. Some experts say that Great Britain's deficit is some kind of payoff for high living standards. The deficit is partially compensated by selling domestic assets (mostly fixed property) to foreigners.
7. Economic Indicators.
Manufacturing PMI showed some contraction as compared to the previous reporting period, thereby coming out worse than expected. Still, it is still 55,3, which is above the critical level of 50. Any value above 50 indicates growth.
Services PMI showed 57.6 last month, also below expectations. Still, it is too premature to consider a tendency change.
8. Index of production. The index has recently been showing clear growth. The latest figures indicate +2,7% y/y.
However, the production level is still below the previous values.
Summing up the economic factors, we can see a clearly positive tendency despite some issues. If the tendency continues, this will attract more foreing investors, thereby backing the growth and a more stable national currency.
9. Monetary Policies. The benchmark interest rate remains at 0,5%, which is the lowest level in several years. The asset purchase program remained unchanged at 375bn pounds while the very bond purchases were made last year. So, the program can be treated as a conventional one.
The latest inflation data turned out to be lower than expected (1,7%). This fact relieves
The pressure and the Uk monetary authorities do not have to raise the benchmark interest rate even despite the fact that the rate of unemployment is below 7% (that used to be the target level). In this aspect, only a sharp inflation hike can make the authorities change their mind.
10. Debt Markets. Let's start wit the UK's credit rating:
As we can see, the rating is fairly high. Still, 2 of the 4 major rating agencies published their negative forecasts. This means that if the ranging is cut, bond yields will start growing, which is a risk for all the holders of UK bonds.
Still, the current economic situation in the UK looks reassuring. So, we are most likely to see bond yields growing. Still, this is going to be minor growth at best.
Now let's switch to bond yields:
We can see that the spread between short-term and long-term bonds is not narrowing, while short-term yields are relatively stable, which means low risks of liquidity.
All in all, the situation is stable, without any threats to the Uk economy.
The bottom line is that we can see a stable and growing economy with some minor issues. Still, positive stable prevail, so the tendency is likely to continues in the near future.
A growing economy attracts more investors and stimulates the demand for the national currency. Sooner or later, the central bank will raise interest rates.
So the fundamental factors speak in favor of further growth. At the same time, technical indicators confirm the idea. Masterforex-V Academy managed to benefit from this by selling put options in the following spots (see the chart below):
