British pound near 5-month top as UK enters steep recession

The United Kingdom has just experienced a truly historic recession, with GDP falling -20.4% in the second quarter. What next for the British pound?


That’s in the rear-view mirror now though, and financial markets are judging the speed of the UK economic recovery. In June GDP rose 8.7% in what Chancellor Rishi Sunak described as “promising signs” for the economic comeback.

 

Chart: GBP/USD (5-years)

chart GBP/USD recession


GBP Outlook

To understand what could happen to Sterling we’re watching:
1. UK Q3 recovery -- PMIs etc
2. End of Furlough scheme in October
3. EU trade talks (Brexit)
4. US trade talks
5. Fate of the US dollar


The consensus state of play amid a lot of uncertainty is that, assuming the pandemic does not get significantly worse via a national second wave - that the UK grows in Q3 as the economy reopens. There is then a potential cliff-edge come Q4 when the government furlough scheme ends in October and we enter the end season on Brexit, where presumably no deal has been reached with the EU.


If we assume the pound has in effect priced in the recession via the drop in March, and much of the Q3 recovery via the rebound since; forecasting a big rise in joblessness from October onwards would suggest another leg lower beneath 1.30 in GBP/USD.


Therefore any chance of an upwards breakout probably rests with the possibility of a US trade deal - or an unlikely EU trade breakthrough - or mostly likely of all a resumption of US dollar selling. UK MP Liz Truss has said US trade talks have concluded ‘round 3’ - with the next round scheduled for September.

 

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