When a country enters a recession, it means a significant economic downturn characterized by a decline in economic activity. Possible events for the GBP include rising unemployment, lower consumer spending, government intervention and currency volatility. Adding to GBP selling pressure will be a near perfect seasonal selling pattern as the UK heads towards the end of its fiscal 4th quarter.
A recession is defined as a temporary economic downturn during which commercial and industrial activity declines, generally characterized by a decline in GDP for two consecutive quarters. Today the UK government announced that its economy contracted by 0.3% in the fourth quarter of 2023. At the same time, estimates remained unchanged at -.1%. The economic decline in the fourth quarter was followed by a decline in the third quarter. This was reportedly a broad-based decline in economic output.
The fourth financial quarter for Great Britain ends in March. During this time, the government plans upcoming spending and often creates cyclical currency price patterns. During this time, selling pressure arises in the Forex market against the pound/dollar pair. We will be referring to the British pound futures markets, but the same patterns apply to the spot forex market as well.
In addition, the Red Sea crisis, in which freighters were attacked and prompted shippers to take longer routes through the area, has already led to a slowdown in imports to parts of Europe. Because Britain is an island, it relies heavily on imports. If they don't receive products to drive their economy, the currency damage could be significantly greater.
A country entering a recession already has a poor outlook for its currency. But as a government's fiscal year also draws to a close, there could be additional selling pressure that traders should be aware of.
Technically bar graph
Source: Barchart
The March daily British pound futures contract above shows the market recovering from the lows in October 2023 and peaking in late December. Since then, the British pound has moved sideways to falling. When a market shows weak technical signals and is faced with the above events, the price should have little trouble trading lower.
Seasonal pattern
Research from Moore Research Center, Inc. (MRCI) has identified significant seasonal patterns during a fiscal year-end for many currencies. It makes sense that a cyclical or seasonal pattern would occur since it occurs annually. Governments typically face the same annual expenses or income as a business or individual.
Given the current declining fundamentals of the UK economy and the seasonal selling pattern that has occurred over each of the last 15 years, there could be more selling than usual this year. I emphasize the word “could” because no one knows the future. At best we can use a recurring pattern that has worked in the past and then think about the probabilities of how likely it is to happen again. 
bar graph
Source: MRCI
MRCI research shows the British Pound's 15-year seasonal pattern (blue line) overlaid with recent price action (candlesticks). The recent price movement has been following the seasonal pattern well for several months. As we approach the upcoming seasonal window (yellow box), we can see that the price of the British Pound has historically declined significantly over the last 15 years.
MRCI has found that in 15 of the last 15 years, the British pound closed lower around March 10 than it did on February 18. During this time, there was never a daily closing decline in five of those years. The seasonal window during these dates allows traders to sell and manage or build and trade or sell a core position. 
bar graph
Source: MRCI
The continuity of this pattern can be seen from the simulated research transactions of the past 15 years. While there are no guarantees of future success, the past certainly deserves a trader's attention in this seasonal window.
Finally
Reports that Britain is heading into recession after two consecutive quarters of contraction in its economy should be a cause for global concern. Economies around the world are now so globally interconnected that an economic downturn in major economies such as the UK will most likely result in contagion for other economies.
The US has avoided recession for now, but the 3-month and 10-year yield curves have remained inverted since November 2022. Historically, a recession occurs 12 to 18 months after this reversal. Many have become impatient and have written off the possibility of a recession because the yield curve has been inverted for too long. We are still within the expected time frame for an economic downturn. Based on data from the Federal Reserve's FRED website, recessions begin only after the yield curve returns from inversion to normal. A short time later, recessions occur. This time is no different, as many experts say.
Turbulent times lie ahead for the British pound. Because we as traders know the fundamentals, technicals and seasonal patterns, we can participate in a market with future signs of weakness.
At the time of publication, Don Dawson did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. For more information, please see Barchart's disclosure policy here.
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