GBP: strategic considerations

Information is not investment advice

Rise and fall of empires

Some 500 years ago, Spanish Empire used to be “the empire on which the sun never sets”. Gradually, it plunged into decline and passed its crown of the mightiest state in the world to the British Empire. Eventually, the latter also seized to exist, recognizing the freedom of its crown jewel, India, in 1947. However, with the sunset of the British Empire and the emergence of the UK, the British interests still had certain islands of external support. One of such islands was Hong-Kong. Initially a British colony, it was taken in a lease in 1898 and was given back to China in 1997. Apparently, it wasn’t a big problem during the last 20 years: while China has been still developing its global presence and internal economic powers, Hong-Kong’s semi-autonomy had room for existence. But now, as China became a true global power challenging the US, naturally, it wants to assert its full control over Hong-Kong. “But the UK is not a competitor for China – it’s the US!” – that’s a fair reply. What does the UK have actually to do with Hong-Kong? Well, what is now the “empire on which the sun never sets”? The US, or rather, its economic presence. And who is the primary ally of the US? The UK, and now it is caught between two fires – or maybe three.

Tangled

The UK is now on the “goodbye” note with Europe. With Brexit underway, the British authorities are trying to fortify their economic and political backup and raise the cooperation with the US to a higher level. That’s reasonable and natural: cutting one tie, you have to fill the void either creating a new one and reinforcing an existing another one. What kind of geopolitical disposition is emerging from this? The US is increasingly protectionist from an economic standpoint. The Hong-Kong issue could be used by the US elites for pre-election purposes as an ideological pawn rather than a true economic lever over China. Hence, the economic domination of the US seems to be going through a peak, or at least, faces a serious question. The Chinese economic global presence is increasing and will keep doing so for a number of factors. The European economy, in the meantime, is also going through difficult times and has a very cloudy horizon ahead. Therefore, taking the side of the US among the three economic powers, the UK is factually limiting its sphere of interests by the zone of the US’s sphere of global economic domination – which will gradually be shrinking. Consequently, as long as the UK is aligned to the US, it’s room for economic and political maneuver will also be shrinking. Logically, this process will spill over to the financial domain and affect the currency. For this reason, against the EUR, the GBP may test its power (if Brexit is managed well). But fundamentally, it is now being set on a narrowing path as the British economy may face inevitable erosion, even without the current recession.

Technical

Since its inception, the EUR has been rising against the GBP. The crisis 2008 reversed that trend, which would only see bulls take over in 2015. Since then, the EUR/GBP rose back to where it reached during its strongest days touching the all-time high of 0.9530. However, even with that resistance having been tested, the overall trajectory resembles a sideways trend with increasing fluctuation. That means, both the Eurozone and the British economy are going through relatively equal disturbances.

The current level at 0.9 is a center of gravity for this trend, and currently, it is decided which of the three ways it will go further. And the Hong-Kong issue may contribute to pushing EUR/GBP: roughly 10% of the UK’s external economic activity is tied to China. If that tie is loosened, it will weaken a significant part of the UK’s external economic presence. If it was only that, then possibly risking 10% would be such a problem – but the rest of the UK economy is mostly relying on Europe with which it is also at odds. Put together, these factors may put the GBP under significant pressure making the EUR/GBP possible rise back to 0.9530 and renew its all-time highs. What will it be? This year will not hesitate to show us.

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