2017 GBP/USD Annual Forecast
GBPUSD had a very volatile and interesting year in 2016 as it experienced the stratosphere as it went as high as 1.50 during the early part of the year but by the end of the end, it saw the mariana trench as well as it fell down to as low as 1.16. Two major events marked the rise and fall of the pair and those were the defining moments for the pair as far as 2016 was concerned.
The first was the Brexit vote that was held in June. This was a vote where the people of the UK had to decide on whether to stay in the Eurozone or decide to break off from the bloc for good. The opinion polls predicted a tough contest but it was assumed that come voting day, better sense would prevail and people would vote for status quo to be maintained. It did look so even halfway through the counting (which pushed the GBPUSD pair to as high as 1.5) but then the tide changed and the final decision was that the people voted to go out of the Eurozone. This caused a huge fall in the pair as it fell down 1800 pips during the course of the day and crashed to the 1.32 region. This was indeed a seismic event as it possibly meant that the UK would give up on the free market access to the Eurozone. This forced the PM to resign as those in favor of Brexit took over and it became clear that the UK will never be the same again.
The next event took place in December where, inexplicably, the pair more than a 1000 pips in early morning trading within a few hours. Though the statements from some of the UK and Euro leaders were blamed but the more logical explanation was for a case of a “fat-finger” under some thin liquidity conditions. Though the pair recovered most of the fall within the same day, the effects are felt even today as the pair continues to trade weakly.
Looking ahead to 2017, there are some fundamental issues which are likely to keep the pair under pressure for a long time during the year. The first one is obviously the strength in the dollar which is going to be a recurring theme in 2017 with the Fed scheduled to make 2-3 rate hikes during the course of the year and these need to be priced into the markets and this would keep the dollar strong in the medium term. The next bigger headache for the pound would be the actual Brexit process. The courts have ruled that there needs to be a debate in the Parliament surrounding the invocation of Article 50 and it is likely that Parliament would like to have a say in every stage of the process. Then we have the issue of Scotland, which voted to stay in the Eurozone but now has to exit it as the whole of UK wanted to exit, trying to come up with plans to see how it can stay in the bloc while the UK exits it. If these are the internal issues which the UK government would need to sort out, then comes the actual matter of the negotiations with the Euro leaders on what would envisage the Brexit, what would be given, what would be taken etc.
Already we see that the UK and Euro leaders being at loggerheads and being intransigent in their positions and both sides would like to play hardball during the course of the negotiations. All this points to a long period of uncertainty and risks as the Brexit process is likely to run into 2018 as well. The markets do not like uncertainty and this is likely to keep the GBPUSD pair under pressure always during the course of this process. We have been maintaining the view that any bounce in this pair deserves to be sold into as a combination of dollar strength and pound uncertainty is likely to be too much for the pair to bounce against. We will continue to hold this view for the medium term entering into 2017. The invocation of Article 50 is scheduled for March 2017 and the staring and shouting games would then begin.
Technically, we do not see the pair bouncing back above 1.30 and we are looking for a revisit into 1.16 during the course of the year in 2017 if the negotiations turn ugly. All in all, we are in for a volatile year in GBPUSD in 2017 and we believe that the bears would hold the upper hand in this pair.