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British Pound Futures: Is Their Recession Going to Tumble the Pound?

Barchart - Fri Feb 16, 9:49AM CST

When a country enters a recession, it signifies a significant economic downturn characterized by a contraction in economic activity. Events potentially facing the GBP are rising unemployment, reduced consumer spending, government intervention, and currency volatility. Adding to the selling pressure of the GBP, there will be a near-perfect seasonal pattern to sell as Britain heads into the end of its fiscal 4th quarter. 

A recession is defined as a temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters. Today, the British government announced that their economy contracted by .3% for the fourth quarter of 2023. At the same time, estimates were unchanged to -.1%. The economic contraction in the fourth quarter followed a third-quarter contraction. Reports state that this was a broad-based decline in economic output. 

March is the end of the fiscal 4th quarter for Great Britain. During this time, the government plans for upcoming expenditures and often creates cyclical currency price patterns. During this time, selling pressure enters the Forex market against the Pound/Dollar pair. We will reference the British Pound futures markets, but the same patterns apply to the spot Forex market. 

In addition, the Red Sea crisis of freighters being attacked and causing shippers to take longer routes around the area has already slowed down imports to parts of Europe. Considering Great Britain is an island, it relies heavily on imports. If they cannot get products to keep their economy moving forward, there may be significantly more currency damage.

A country entering a recession will already have a weak outlook on its currency. But, when a government is also coming into its fiscal year-end, there could be additional selling pressure that traders want to be aware of. 

Technical 

Source: Barchart 

The above daily March British Pound futures contract shows the market rallied off the October 2023 lows and peaked at the end of December. Since then, the British Pound has traded sideways to down. When a market shows weak technical signals and faces the abovementioned events, the price should have little trouble trading lower. 

Seasonal Pattern 

Moore Research Center, Inc. (MRCI) research has identified significant seasonal patterns during fiscal year-end for many currencies. A cyclical or seasonal pattern makes sense because it happens yearly. Governments typically deal with the same yearly expenditures or receipts as corporations or individuals. 

With the current bearish fundamentals facing the British economy and the seasonal sell pattern that has occurred each of the past 15 years, this year could see more selling than usual. I emphasize the word could because nobody knows the future. At best, we can use a reoccurring pattern that has worked in the past and then think about the probabilities of it happening again. 

Source: MRCI 

MRCI research shows the British Pound's 15-year seasonal pattern (blue line), overlaid on the recent price action (candles). The recent price action has followed the seasonal pattern well for several months. As we approach the upcoming seasonal window (yellow box), we can see that historically, the British Pound has significantly declined in price for the past 15 years. 

MRCI has found that the British Pound has closed lower on approximately March 10 than on February 18 for 15 of the past 15 years. During this time, 5 of those years never had a daily closing drawdown. The seasonal window during these dates allows traders to sell and manage or build a core position and trade in and out of it. 

Source: MRCI 

The past 15 years of simulated research trades outline the consistency of this pattern. While there are no guarantees of future success, the past certainly deserves a trader's attention to this seasonal window. 

In closing 

Reports of Great Britain entering a recession after two successive contracting quarters of its economy should be a concern globally. Economies worldwide have become so globally connected that when significant economies such as Great Britain suffer economic contraction, it most likely will become a contagion for other economies. 

The US has eluded a recession for now, but the 3-month and 10-year yield curve remains inverted since November 2022. Historically, a recession occurs 12-18 months after this inversion. Many have become impatient and written off the possibility of a recession because the yield curve has been inverted for too long. We are still in the expected timeframe window for a downturn in the economy. Based on data from the Federal Reserve's FRED website, recessions do not start until after the yield curve goes from inverted back to normal. It's a short time after that when recessions occur. It's not different this time, as many pundits are saying.   

The British Pound has some turbulent times ahead. As traders, we can participate in a market with future signs of weakness by being aware of the fundamentals, technical, and seasonal patterns.  



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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.

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