Currency markets keep demonstrating volatility on the background of global instability in the world. The stand-off between the United States of America, China and European Union has been compounded by the financial problems in Italy and by the aggravation of the situation regarding the possible Great Britain’s exit from Eurozone.
Investors have not yet decided which side to move to. This fact explains volatility.
November 14 turned out to be quite stormy for this currency pair. GBP/USD pair was demonstrating spikes and valleys all day long, while remaining in a pretty tight range. The presence of a flat indicates that the positions of “bulls” and “bears” are equally weighted and that the market is full of uncertainty against the background of Brexit.
The behavior of this currency pair can hardly be described as logical (at least, from the predictability’s point of view, it is the most unpredictable one). Otherwise, how can we explain the fact that the chaotical Brexit managed to crash GBP down to the level of 1.2, and the possible agreement between London and Brussels managed to raise it up to the level of 1.4? This gives an impression that the possibility of Brexit is just a manipulation tool in the hands of mass media.
After all, there is still not any agreement, and many territorial matters of the UK are yet to be solved. But mass media has already released some information saying that this agreement exists and its ratification in the Government and Parliaments is just a formality.
According to forecasts made by Wells Fargo, the negotiations between London and Brussels would be phased. The sheer fact that this agreement (which actually means that Great Britain will remain in European Union) exists, will push GBP up by 1% and, once it is approved by the Parliament, – by 2-3% more.
With the successful scenario, GBP will grow against the US dollar up to 1.4 within 6-12 months. If, however, London and Brussels fail to establish a common denominator, then GBP may decline against USD and EUR by 4-6%.
EUR/USD – is another currency pair that demonstrated its maximum volatility level yesterday (on 13th November). One of the factors that caused this volatility was the publication of data about the consumer price inflation for the previous month. On an annualized basis, this indicator was 2.5%, which coincided with the forecast. In comparison with September, the inflation rate has increased by 0.3%.
Against this background, the US dollar has been strengthened against EUR. The increase of the current inflation rate over the inflation targeting (2%) confirms the forecast of the monetary policy tightening, namely the discount rate increase during the meeting of the US Federal Reserve System in September (consequently, growing investors’ interest in USD).
Another factor that, in contrast, supported EUR by the end of the day, was the publication of statistics about Q3 GDP in Europe. The qtr/qtr growth was 0%, yr/yr – 1.7%, which coincided with the analysts’ forecast.
Analysts recommend taking short positions regarding EUR. In spite of some relative weakness of the US dollar, EUR has more reasons to decline. On November 21, European Union will announce its official opinion regarding the Italy’s revised budget. Up until that moment, the market will remain uncertain, which means that we should expect both-side volatility of currency pairs.