What to expect from Sterling in 2020?

What a rollercoaster ride for Sterling this year. What can we expect from GBP in 2020?

To recap, Sterling started the year when Teresa May was still in charge of the Brexit negotiations. Sterling appreciated in the first quarter as investors broadly supported the EU Withdrawal Agreement (WA). But tragically Number 10 failed, in three attempts, to push the WA through Parliament. Confidence waned. Throughout the whole summer, Sterling suffered from a brutal decline. Prices only hit the bottom when Boris Johnson became the new Conservative leader and PM. Sterling’s recovery hit a peak on December 12 when Boris Johnson received a decisive mandate from the electorate

Will we see a repeat of Sterling’s rollercoaster ride?

First, 2020 will an interesting year because we will have the a new PM and new Bank of England governor for the first time in years. Together, they will set new fiscal and monetary rules in the coming years. The incoming governor is likely to maintain Carney’s dovish monetary policy for the time being.

Second, the fact that Sterling’s post-election rally failed to sustain is telling. Following the latest Queen’s Speech, the government will rule out an extension of the Brexit transition period. The market obviously didn’t like this and investors sold out of the euphoria. On GBPUSD, the decline is only checked by the technical support at 1.3000. It is possible that traders are booking profits into the year-end. Still, swift trend reversal is a sign of weakness.

Third, as the UK is leaving the EU as early as January 2020, the market is now looking towards the trade phase with the EU. Will this negotiation be favourable for both UK’s service and manufacturing industries? Hard to say now. There are different scenarios that could happen and none of them has a commanding probability now. So Sterling volatility is likely to stay.

Fourth, will we see a rebound in the UK economy after the election? May be. But the economic risk remains tilted to the downside because of Brexit. Retail sales, construction activity, property prices, etc are currently all stuck in the doldrums. It would take a combination of strong external demand and internal stimulus to pull the economy up decisively.

Lastly, Sterling is a broad recovery mode. Many Sterling pairs have rebounded significantly from their long-term lows, e.g. GBPCAD. But these uptrends are near-term overbought and may be due a correction into the New Year. In the next couple of months, I expect many Sterling pairs to trade in the upper half of the range recorded from summer low-winter highs. For example, on GBPEUR the range is about 1.140-1.200.

Overall, 2020 may be a calmer year for the Pound Sterling – but only just. Many economic and political factors uncertainties may impact the rate. Given this scenario, Sterling will definitely present chances to buy bottoms and sell overbought rallies in the new year. Stay tuned.

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