Trading the pound on Brexit news (part two)

By considering mere fundamental (macroeconomic) factors, a pound at $1.30 level is undervalued. Any “no deal” scenario will push the Sterling down to $1.20. On the contrary, any “deal” scenario will push the currency up at around $1.50 or even higher. This means the reward/risk trade-off suggests going long on the GBPUSD.

What about trading the dollar? Let’s consider the current monetary scenario. The Federal Reserve has recently declared it is willing to pause the interest rate cut path. An hawkish move. This could reduce the supply of dollars and increase the cost of borrowing in dollars, ceteris paribus.

There are other macro factors which impact the pound. The US is facing protracted fiscal and current account deficits. This is generating both a funding gap and a fiscal imbalance. In the long-run, ceteris paribus, the US needs to weaken the dollar, to pay off its debt and decrease its trade deficit. Many economists believe also that positive effects of the Trump administration’s tax cuts and deregulation will end next year and productivity outcomes will shrink, while the borrowing will increase further, increasing the fiscal deficits.

In conclusion, a “no deal” Brexit would be bearish for the pound. If temporary, the pound is expected to decline, to then bounce back. However, British politicians know the economic side effects of a “no deal” scenario and they will likely try their best to avoid it. Any “deal” Brexit would be bullish for the pound instead and would likely result in a move back to 1.45 or more for the GBPUSD.

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