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Trading GBP: what the big picture says


15 November 2022

After hours of combing over interest rate reports, unemployment figures, and import/export regulations, nothing showed up that would inspire someone to trade GBP, and certainly nothing that could suggest going long. Is GBP a low buy opportunity, a dead duck? Are even more bearish times on the horizon?

Dominant media and signals sites seem to be happy pumping out jargon filled analytic articles that don’t lead to any conclusions about the UK’s economic future. A step back to look at the bigger picture was needed, and what showed up was unquestionable.

GBP price history

Sterling hit a low of $1.04 (USD) in September, and many thought “this must be rock bottom”. The low prompted a brief “buy” flurry that already shows signs of fatigue. A possible trend break struggles to form at the time of writing this, but there doesn’t seem to be anything substantial behind the candlesticks to fuel a long-term rise. Short-term analysis doesn’t paint a pretty picture for GBP.

Stepping back for a wider view of GBP’s price history, trading prices haven’t been this low since the previous century. In fact, to get this low, we have to go all the way back to the 80s recession, specifically 1985, when GBP hit $1.07 following a brutal 5-year crash.

Jump two decades to the next recession in 2008, and we see another crash, a fall which GBP never truly recovered from. There’s a clear downtrend in 2022, on top of a very clear downward channel spanning 20+ years. If history counts for anything, a recession kicking in at a time when GBP is so weak could leave a sizable scar on the UK’s economy.

More bad news for GBP

Brexit didn’t help the British economy. Over 400 companies completely or partially moved their business, employees, and assets out of the UK and back into the EU. Morgan Stanley, Barclays, and Goldman Sachs Morgan have already moved their senior bankers, but the exodus is still ongoing. Financial positions in London alone have fallen by over 7,000 since Brexit. A negative factor for the British economy.

People may be leaving the country, but exports are not… at least not like they used to. Exporting products and goods fell by 46%, and all imports from the 27-nation union are now taxed like never before. And just when things couldn’t look worse, war prompted an energy crisis in Europe. The UK took yet another hard hit, and millions of Brits face a cold and expensive winter.

Then came the interest rate hikes, and another all-time-high smashes the UK. Even the Bank of England is forecasting further rate increases to the tune of 75 base points… the biggest we’ve seen since 1989. There’s plenty of rain, but not a rainbow in sight for GBP.

The big picture

It would be nice to ditch the doom and gloom and focus on a positive point. There isn’t one. No matter how much digging, there’s isn’t one single piece of news that could suggest GBP might regain lost strength. There’s no bailout, no central bank solution, and every institution big enough to make a difference exited the UK two years ago. The United Kingdom and GBP stand alone, and they don’t have any cards to play.

And with recession fears rising, how low GBP will go is on everyone’s mind. Look at the depth of the previous recessionary declines on the graph above. GBP may well sink a lot more in the coming weeks and months, and a recession hasn’t even started yet. 

Strong caution is advice to anyone adding GBP to their portfolio. If you’re thinking of  shorting GBP, keep in mind that desperation will prompt the UK and the Treasury to throw a few economic Hail Mary strategies, which will increase market volatility, and  involve risks for leveraged traders. Set all possible pending protections, ensure that your equity is balanced with risk/reward, consider lowering leverage, and then watch GBP like a hawk.

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