After the most uncertain election for a long time the UK decided to stay with a Conservative government which was a positive factor for GBP across the board. Trading of Cable in the MENA region reached record levels and the pair is still attracting strong flows. However, there are risks involved in the coming weeks and months, which may change the current neutral outlook to positive. The first is the Federal Reserve’s policy and the second is the UK’s referendum over its EU membership.
The Federal Reserve promised back in October of last year that rates will start rising in June of 2015. Since then traders across the Middle East have followed the global trend, buying into the US dollar, which contributed to the GBP declining more than 10% since the Fed ended QE. But, we have always had concerns over the timing of the rate hike as most of the US economic releases so far this year have come in lower than expected. This view is shared by some elements of the market which has caused a short squeeze on GBPUSD. If the US rate hike is delayed for another quarter or two this could lead to a notable adjustment in the FX market. Most players have already priced in the rate hike, so we need to look at how this would unwind if the Federal Reserve really feels that the required economic conditions for a hike have not been met.
The Conservative party is still planning to hold a referendum about the UK’s membership in the European Union. Holding the referendum would be a negative factor for GBP, but if the result is for the UK to stay in the European Union, we could have a broader stabilization in GBP across the board and the speculation will shift to when the BOE is going to go for a rate hike.
The current interest in the GBP across the Middle East has led to record regional trading volumes. Alongside sterling, the euro and yen and still gaining interest with many investors also looking at the RMB.