Updated: Mar 28, 2021
The UK economy is likely to take a huge hit in the coming couple months. It has been announced over the festive period that the UK will go into a national lockdown with businesses and consumers having to shut and isolate. What does this do? It restricts spending and therefore money flowing around the economy.
Rishi Sunak has even quoted that the UK is to "get worse" over the next couple months before its set to get better and we need to embrace the coming downfall.
GBPPLN High Level Fundamental Summary
Overall the fundamental outlook is looking increasingly promising on the short side for GBPPLN. Majority of the economic variables are suggesting a downside move is to continue. However, the GDP differentials signalled an opposite conviction whereas the interest rates have maintained a neutral differential.
I would be very interested in a drop in the interest differential considering the Bank of England was considering negative interest rates. This would further drive a downside sell off on the GBP.
Macro Currency Strength Meter - Logikfx
The Logikfx Macro Currency Strength Meter as many of our readers and traders know is a currency strength meter that is calculated by analysing various economic reports and anticipating a future directional move from this.
What we has seen on the currency strength meter is an interest divergence again. This time round for GBP/PLN. The GBP macro score has been falling and stayed in a negative score throughout January, on the flipside PLN has been picking up speed gaining points over a month. This means we can focus on the short side moves on GBPPLN looking to position ourselves well in the market and make sure the other economic variables are also agreeing with this idea.
GDP Differential Indicator
Overall, the GDP Differentials was one of the indicators that contradicts our downside bias on GBPPLN. We've seen that overall this year we're expecting the UK to outgrow Poland significantly. This 7.5% change from last year creates a bullish bias on GBPPLN. So for now we need to consider this moving into the analysis.
BRENT Oil Prices vs GBPPLN
We've talked about BRENT Oil prices being an analysis talking point in previous posts. The main reason being the UK still and does export a lot of oil across the world and they source that oil from the North Sea.
The correlations we've found over the past 10 years with GBPPLN and Brent oil is there's a -29% correlation. This means when the prices of oil go up we can expect downside moves in GBPPLN and vice versa. BRENT Oil is on a nice little rally, nearly recovering from pre-covid levels which suggests a potential downside move in GBPPLN similar to that from October 2015 to July 2018.
Gold vs GBPPLN
Gold is another large export in the UK which isn't discussed much. Again when analysing it against GBPPLN we have concluded a negative correlation of -23% but this time round gold prices have been falling. This means it's actually contradicting the analysis as it's suggesting a potential upside move on GBPPLN.
Overall on the import and export analysis one of the variables is saying short and the other long. This means we're now looking at our final variable to see if we should short or long based on the import exports.
Volkswagen vs GBPPLN
Cars are actually a top export not only in the UK but also in Poland. One of the countries that Poland exports heavily with is Germany which is the homeland of VW. Volkswagen have various manufacturing factories in Poland and lots of buyers in the UK.
Over the past 10 years when we put the data side by side we saw that they had a 38% positive correlation and you can kind of see that the VW is a potential leading indicator on GBPPLN. What we've seen is that VW have hit a significant resistance level at which covid happened and shorted heavily. The same is seen currently on GBPPLN so we'll see if these levels hold or not but the overall VW data is saying we should be shorting GBPPLN which wraps up our import export analysis.
Interest Rate Differentials
Again we're considering the interest rate differentials but what we've seen across the board is central banks have opted not to touch their already low interest rates. Instead most have opted for money printing and quantitative easing. Currently the interest rate differentials between UK and Poland are sitting on a fat 0% so we have a neutral outlook on interest rates.
What we might see is that the UK potentially hitting negative interest rates with the Bank of England already considering this measure to combat the economy from the pandemic. If this comes out then we'll see interest rate differentials drop and also GBPPLN.
Domestic Stock Market Performance
The FTSE100 is one of the stock indices in the UK which is yet to actually recover. It shows overall that the UK has really struggled during the pandemic with the top 100 companies not even recovering to pre-covid levels.
These levels are currently sitting 8% away from pre-covid levels meaning UK companies are still struggling and the current lockdown is not helping. It means their doors are shut for at least 2 months meaning their profits will bleed further unless they've adapted online.
This is suggesting a bearish move which agrees with our GBPPLN downside move on the currency strength meter.
Now that we have our fundamental outlook to short GBPPLN it's now our job to time that move, to do so we'll check sentiment and price.
GBP COT Report Open Interest
The Hedge Fund positioning on the Sterling GBP seems to be flat. Most likely with hedge funds not taking on extra risk due to Brexit announcements coming out this month. The past 3 consecutive weeks we've seen a 0 open interest meaning that there's no consensus that hedge funds are short or long. That's why we had a neutral outlook on COT sentiment.
The GBPPLN price trends have been interesting. Over the past year we've seen prices congest and not really break into new highs meaning sellers are majority in control. We've seen that there's a potential trend line and resistance level that short sellers have come in on a profited in the past. If they deem these levels good to sell again we could see prices get rejected again.
One point to consider is that the GBP has been in a negative macro score for a long time now and potentially bullish data could be released. Overall I think the position is looking interesting but we should really wait for a confirmation on the COT indicator to get our short side bias to make sure we're not trading against the market. - Matty, Logikfx
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