In December last year, we put forward the view that Sterling would not be held back by ‘Brexit Resistance’, the popular term at the time, and would break through the 1.34 mark and reach 1.42.

This was going against the consensus view of most banking analysts.  Even with all the noise, we were convinced Brexit was priced-in, and that the UK would continue to have strong sustained growth after leaving the EU.

We stuck with our call, and I am pleased to say that Cable has just hit our target of 1.4225.  So we wanted to revisit Sterling, look at the background to our call, and where we think GBP will now go.

Background to Brexit Resistance

In 2018, the Sterling took a tumble against major international currencies, dropping from above 1.43 to less than 1.25 against the US Dollar.  In 2019, GBP/USD rebounded slightly, however the currency pair was unable to crack the 1.34 mark which is why some technical analysts named this level ‘Brexit Resistance’.

In 2020, markets were still suffering Brexit uncertainties, and the effects of the coronavirus pandemic on the UK, both societal and economic, were seismic to say the least.  This led the pound to crash to 1.1420 as Britain suffered the biggest economic recession amongst European economies.

Not surprisingly, most analysts predicted the Sterling will remain weak for 2021 as the debate was focused on how deep the recession will be and how long it will last.

 

GBP/USD chart (December 11th, 2020)

 

On December 25th, 2020, the United Kingdom and European Union finally reached a post-Brexit trade agreement after years of fraught negotiations.  Most importantly we predicted that, despite issues over dealing with Covid, the UK vaccinations roll-out plans seemed to be ahead of the game.  We were right, with today only Israel and the United Arab Emirates moving faster.

This has led to analysts change their narratives and they are starting to project that the UK will remain one of the fastest growing economies in the G7 until 2050, outpacing leading EU countries like Germany, France, and Italy.

Their views have been changed by the performance of Sterling which has been shining since the beginning of 2021, and yesterday on February 24th, Cable reached our target at 1.4225.

GBP/USD chart (February 25th, 2021)

 

What’s Next for Sterling?

Now our target for 2021 has been reached, where do we predict the Pound will go from here?  The strong upward momentum is starting to show signs of weakness, as we approach the 2018 highs of 1.43 / 1.4350.  A near-term correction lower to 1.40 and 1.39 could be a good thing given the rapid enthusiastic rise from 1.32 to 1.42 in less than three months.

However, on the longer-term, what we are going to see is a country where everything was on hold and demand was pent-up.  But the UK has been developing successful trade and investment links with faster-growing emerging economies.

On the pandemic front, outpacing Europe and the US on vaccinations will give Britain a massive economic prize.  This could lead to the pound soaring to the multi-year consolidation zone at 1.54 / 1.58 by the end of 2021 and the trade will be one of the biggest in the world.

Our positive long-term growth projection for the UK, however, depends on the country continuing to attract and employ a talented workforce to offset probable weaker trade links with the EU.

 

For more information about Brexit, read our Brexit Financial Guide.

 

 

Rony Nehme

Rony Nehme

Chief Market Analyst at SquaredFinancial

Rony has over twenty years of experience in financial planning and professional proprietary trading in the equity and currency markets. Prior to joining SquaredFinancial, Rony educated and coached numerous traders helping them find their edge and arming them with proven trading methodologies to successfully battle the markets. Rony obtained a B.S. in Finance from Concordia University in Montreal, and his professional designations include Certified Financial Planner CFP® obtained from the Canadian Securities Institute.

 

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