The pound seems to have set out to prove that the exit of UK from the European Union is absolutely the right choice. If the euro continued to decline over the past week, the pound, on the contrary, grew. Over the past five days, the GBP/USD pair has added almost 200 points, reaching a local high around the 1.3060 mark.
Although the currency went down due to the unexpected resignation of British Finance Minister Sajid Javid, it quickly turned around after the new head of the department became the experienced financier, Rishi Sunak. Investors interpreted his appointment as an attempt of Prime Minister Boris Johnson to increase control of the Treasury, as well as a way for the government to increase public spending.
Because of this, expectations that the Bank of England will cut the interest rates in the near future have almost disappeared. Now, the futures market will lay down rates by 25 basis points no earlier than December 2021.
According to some experts, the pound has good prospects of growth this year, as it will play back unrealized fears about UK's disordered exit from EU.
Moreover, it is assumed that tax cuts and increased budget spending, which Rishi Sunak is an apologist for, can seriously fuel interest in the British currency. Thus, the GBP/USD pair is expected to approach the highs of 2018 in the area of 1.43.
In addition to the resignation of Finance Minister Sajid Javid, UK presented other surprises.
Regarding the departure of UK from EU, according to the latest statements of the parties, there is a risk that they will constantly face disagreements during the transition period, and there is not much time left to resolve the disputes.
Sky News television channel reported that the British government considers EU's terms of a free trade to the country as excessive and ridiculous. The discussion of this will start in March.
Brussels demands that London continue to comply with European subsidy and tax rules, and allow the Alliance to monitor their compliance. However, UK does not agree to the proposed terms, as Canada, South Korea and Japan, which have previously signed similar agreements, were not required to do so.
Boris Johnson and other British politicians have repeatedly pointed out that the country will refuse to strictly comply with EU's regulations.
If the free trade agreement between the parties is not concluded before the end of the year, and the transition period is not extended, they will start trading under WTO rules, which will return numerous customs tariffs.
"Even if the British government provides increased fiscal stimulus, investors trading the pound will continue to be worried about the negotiations on the trade deal between UK and EU in the coming weeks," Rabobank believes.
Moreover, the bank's experts said that "although the pound will receive support from the expectations of an increase in public spending in the budget that will be presented on March 11, market participants will closely monitor politics, as the upcoming trade negotiations between London and Brussels are likely to be tough. Given the threat of a bad deal, or even its absence at the end of the transition stage after Brexit, we believe that the GBP remains vulnerable.
They expect the GBP / USD pair to trade below 1.30 in the next one to three months.