As Great Britain faces a tumultuous economic climate, marked by rising unemployment and reduced consumer spending, the question on the minds of many investors is whether the British Pound will weather the storm. The recent announcement of a 0.3% contraction in the economy for the 4th quarter of 2023 solidifies the country’s economic challenges. This decline followed a similar contraction in the 3rd quarter, indicating a widespread downturn in economic output.
Adding to the strain, Great Britain is approaching the end of its fiscal 4th quarter. During this time, the government’s budgeting decisions often create cyclical patterns in currency prices. These patterns are expected to exert selling pressure on the Pound/Dollar pair, further complicating the currency’s outlook. Moreover, the recent Red Sea crisis has slowed down imports to parts of Europe, a matter of acute concern for an island nation heavily reliant on imports.
Technical Perspective
Source: Barchart
The daily March British Pound futures contract illustrates a market that has traded sideways to down after peaking at the end of December. In the face of weak technical signals and the aforementioned events, the British Pound is likely to encounter further downward pressure.
Seasonal Patterns and Market History
Research has identified significant seasonal patterns during the fiscal year-end for many currencies, including the British Pound. The upcoming seasonal window suggests a historical trend of significant price declines as the British Pound futures have closed lower on approximately March 10 than on February 18 for the past 15 years. MRCI has found that during this period, the British Pound has faced substantial price declines, making it an important consideration for traders to strategically enter and exit the market.
Source: MRCI
The consistency of the historical pattern over the past 15 years deserves careful consideration, although past performance is not a guarantee of future success. However, the recurring nature of this pattern merits the attention of traders seeking to navigate the currency market.
Global Economic Outlook
Great Britain’s entry into a recession after two successive quarters of economic contraction is of global concern. The interconnected nature of the global economy implies that economic challenges in significant economies such as Great Britain could potentially trigger a ripple effect, impacting other economies worldwide. In addition, the US economy, despite its current resilience, faces its own economic indicators, such as the 3-month and 10-year yield curve inversion, which historically precedes an economic downturn.
As the British Pound braces for turbulent times ahead, traders are advised to heed the fundamental, technical, and seasonal factors at play in the market, allowing them to make informed decisions amid signs of potential weakness.
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On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
