British Pound Hit By Trade War Crosswinds But Brexit Looms Large

GBPUSD 2 Hour Price Chart

BRITISH POUND FORECAST: NEUTRAL

  • Trade war worries fuel bifurcated British Pound trade, but…
  • …Brexit considerations still in focus for trend development
  • Soundbites from G7, UK/EU officials might spark volatility

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The British Pound has not been immune to crosswinds from increasingly acute worries about slowing global growth as the US-China trade war escalates, but Brexit considerations have taken top billing. It has lost about 1.5 percent against an average of pro-risk currencies like the Australian and New Zealand Dollars while shedding close to 4 percent against the anti-risk US Dollar, Yen and Swiss Franc.

That it has fared better against cycle-linked FX speaks to those units’ outsized sensitivity to the realized and expected downturn in economic activity as tit-for-tat tariffs and bellicose rhetoric disrupt supply chains anchored to the US-China trade route. Weakness against both ends of the sentiment spectrum suggests worries about a disorderly divorce with the EU continue to be front-of-mind for investors.

COMMENTS FROM G7, EU AND UK OFFICIALS MAY SPARK KNEEJERK VOLATILITY

From here, the G7 leaders’ summit in Biarritz, France over the weekend might offer something of a lead for the week ahead. Brexit will almost certainly come up in discussions, but the expected absence of a joint communique means traders will be relegated to parsing whatever sideline soundbites the attendees are gracious enough to offer. The outing may yet pass with a whimper.

Sporadic pronouncements from MPs drawing the battle lines for the domestic Brexit debate before Parliament return from summer recession on September 3 might generate one-off bursts of kneejerk volatility. Similarly-flavored comments from assorted EU bigwigs could nudge prices one way or another, but lasting follow-through will probably have to wait for substantive developments with concrete policy implications.

TRADE WAR ESCALATION TO DRIVE UNEVEN BRITISH POUND PERFORMANCE

On the data front, a week shortened by a UK bank holiday on Monday offers few highlights. A light sprinkling of domestic statistical releases seems unlikely to alter the outlook in a material way. This leaves the door open to external influence. Trade war rhetoric might heat up before the latest tariffs trigger on September 1. A repeat of Sterling’s bifurcated performance against risk-geared assets could follow.

— Written by Ilya Spivak, Sr. Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivakon Twitter

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