Where next for GBPUSD?

It is a widely accepted opinion that politics can affect currencies (along with energy and gold) more than any other markets. Hence the race for Number 10 Downing Street stands to be crucial for the future direction of the pound sterling. So far, the UK Prime Minister contender Boris Johnson has rather easily overcome his wide-ranging rival Tory MPs, with only Jeremy Hunt remaining in the contest. Johnson is clearly the favourite with the Conservative membership if the votes so far are anything to go by (he already crossed the magic threshold of 105) and as a result, should be confirmed as the new Prime Minister over this coming weekend.

So, where does Boris Johnson stands with regards to Brexit?

He is adamant that a new deal can be struck with EU, one that is more favourable to the UK, although to do that he is constantly refusing to take a no deal Brexit off table. That puts him at odds with UK Parliament who will not allow such a deal. On the other hand, the EU said they will not renegotiate. It’s clear that something will have to give, one way or the other. The perceived risks are Britain crashing out of the EU with no deal, or a second referendum on Brexit, general elections followed by a Labour win, or yet another delay beyond the current deadline of 31 October this year.

Depending on the different methodology used, and certainly historically, the general consensus is that the pound sterling has a fair value range of somewhere between 1.50 to 1.60 to the US dollar (aqua strip on the chart). But for a return to these levels to occur, the Brexit issue probably needs to be put to rest, one way or the other. It was the ongoing uncertainty that took its toll, resulting in GBPUSD nosediving last week, dropping below the strong support around 1.25 mark. It reached a two-year low of 1.2440, the weakest level since April 2017 (although this level is being tested at time of writing). A string of disappointing UK economic data also acted as catalysts in hurting the pound.

Somehow in another twist of events the Federal Reserves offered a brief respite. Fed Chair Jerome Powell was very dovish in his testimony in front of Congress saying that US-China trade dispute is of particular concern going forward. This despite the surprisingly much better than expected non-farm payrolls figures. As a consequence, the dollar was badly hurt, which allowed GBPUSD to rebound to 1.2578. That was rather short lived, and sterling is now back below the psychologically important 1.25 to the dollar.

On the downside, all the eyes will be on support around 1.2450 – 1.2500 area. If that does not hold it could open the door for another slump to the next support level just above 1.2350 last seen in March 2017, followed by 1.2200. A retest of the record low of 1.1987 seen in January 2017 cannot be ruled out either.  

On the upside a close above 1.25 will bring in the support turned resistance at 1.2570 followed by major resistance at 1.2750. It is also quite possible the market hangs about in a consolidation pattern for a while due to a lot of unanswered questions about Brexit. Furthermore, as it is summertime, politicians take a break, traditionally resulting in a quieter period, certainly in terms of political news.

Further consideration should also be made to the 9 day (pink line) and 21 days (blue line) moving averages. It can be seen that when the 9 MA crossed below the 21 MA, it signalled a drop in the GBPUSD, like it did in August 2008, November 2014 and June 2018. Conversely it signalled a rise in October 2013 when the 9 MA crossed above the 21 MA. It looks like the crossover is a good signal in trending markets and not in a consolidation period (2009 to 2014). Currently the 9 MA is below the 21 MA but before we rush into the bearish outlook, it could be possible that we see another sideways range largely between 1.1980 – 1.4250.

One final note; the chart shows the sterling being in a downward trend well before the Brexit vote, and the pullback just before June 2016 was probably driven by expectations of a winning Remain vote. Is this recent move lower a further confirmation of this long-term trend!

Our Fed is very disruptive to us

It seems the US has reached an agreement with Mexico and President Donald Trump has now tweeted that tariffs would be suspended indefinitely. So much for ‘tariffs are a beautiful thing’ then… As a result, the greenback was given a lift, despite the weakest US employment report released less than 24 hours before. Later this month we could see the re-opening of negotiations between China and US at the G20 meeting, although it’s widely understood that a resolution of trade tensions between these two will require a lot more effort.
We saw a larger than anticipated trade surplus for China in May due to higher than expected exports (despite trade dispute escalation), coupled with lower than expected imports. At the same time, Chinese state-owned Bank of Communications International said ‘weakened valuation of the yuan is decided by the recent tough trade environment China is facing’ but added that they believe the yuan will drop below 7 within 3 months.
The race for the UK Prime Minister has seen the first round of voting which the clear favourite, Boris Johnson, has won by quite some margin after promising an income tax cut. He has already expressed his views that Brexit will happen on October 31 with or without a deal. However, despite previous concerns about a possible hard Brexit hurting the pound, cable (GBPUSD) was trading conditions were stable, around 1.2650, Friday morning.
Meanwhile, the ECB officials are starting to fear the market is losing confidence in the region inflation’s control which could force another round of stimulus to re-establish control. So much so that governing council member Olli Rehn said the central bank could strengthen forward guidance, cut interest rates and relaunch quantitative easing.
Australia’s (May) employment data release showed mixed signals, with an addition of 42.3k jobs (hugely above the expectation for 16k gain), while unemployment rate came in at 5.2% versus 5.1% prediction. Aussie dollar moved lower with many now seeing an increased chance for further easing in the coming months.