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In recent years we can say that the pound has undergone a sharp devaluation. Perhaps the time has come to see a reversal of this long-term trend.
Will the Pound Be as Strong as It Was Before Brexit?
The BoE similar to the Fed
Before speaking in the strict sense of the pound as an exchange rate, it is absolutely necessary to make a premise about the work of the Bank of England (BoE). In recent months we have seen the Fed being quite aggressive, even reasonable, in raising interest rates given also the high inflation and the large size of the US economy. The BoE has taken a more similar attitude to the latter compared to the ECB.
Sterling rates are currently at 1%, yet we don’t see a major impact on the exchange rate from the decisions made by the BoE. In fact, if we compare EUR to USD and GBP to USD, we can see that they have a similar trend, therefore the “interest rate” element is not fundamental, at least in the short term
Ftse Mib, what to expect for the next few weeks?
In 2007 the GbpUsd exchange rate was well above 2.00, and to think that we are now around the 1.20-1.25 area, a drop against the dollar of about 40%. Considering the fact that the Forex market is an “equilibrium market”, this loss could be compensated in the long run.
Brexit dealt a severe blow to the pound, which saw further losses in value against the USD, reaching a low in the 1.16 area starting from 1.50 from June 2016 until October of the same year. To date, given the long-term technical overview, it has been 6 years since the market has managed to keep all lows below 1.18. This long-term momentum indicates some strength for the pound to hold the lows and perhaps try to reverse over the next few months.
What to expect from GbpUsd? – The synthesis
The attached chart is a monthly chart, i.e. each candlestick on the chart is a trading month. In summary, we can say that the BoE will raise interest rates further, certainly more aggressively than the European Central Bank, more in line with the Fed’s work. In addition, we must consider the fact that inflation in the UK is at 9%. Therefore the BoE is forced to raise rates in a timely manner, forcing the market to see the Sterling as a currency that could increase in cost over time.
UK – Annual inflation jumps 9.0%
To date, given interest rates and inflation, the pound could be at a very long-term low. As we see in the graph, the green rectangles indicate reversal zones that could be decisive in the long run and show us how the exchange rate could reverse. As we can see in the last of the green zones, the market is trying to reverse, and a positive end of the month of June could be decisive in establishing a possible long-term reversal of this change. The upward break of the 1.27 area and the June close above it will be decisive for establishing a long-term reversal.