Marius Paun | London, UK | Senior dealer | Thursday, 17th December 2020
It’s been a rollercoaster ride for GBPUSD trading lately. It dived to over 3 weeks lows last week when European Commission President Ursula von der Leyen said that the UK and the EU haven’t been able to achieve a ‘fair balance’ on Brexit outstanding issues; fisheries, level playing field and resolving disputes. She added that there were low expectations that a deal could be reached at all, but the EU was still willing to grant UK access to the single market under ‘fair conditions’. It seemed all bets were off, especially when UK Prime Minister Boris Johnson warned about a high possibility that the trade talks would ultimately fail.
One by one, all the summits ended with no apparent progress and officials on both sides stated that the parties remain far apart on the existing key issues. Once again, we were told the ‘final’ decision will be made on Sunday 13th December. Andrew Bailey, Governor of the Bank of England, also weighed in saying there are ‘limits to what his institution can do to mitigate the disruption caused by a no-deal Brexit. Don’t you just love politics!…. comes Sunday, both sides vowed to go the extra mile to see if an agreement can be reached, amid signs of progress. However, Boris Johnson said the most likely outcome is a no-deal Brexit on World Trade Organisation terms and he urged businesses to be prepared for that scenario.
It seems that was enough to overturn the downtrend in GBPUSD, which resumed its rally this week. It is fair to say that cable is usually more a function of the US dollar strength or weakness than pound sterling. That’s because the greenback’s is much more important, the currency of international trade and representing the biggest part of currency reserves. And suffices to say the US dollar is in a bear market, exacerbated by the Covid pandemic.
Yes, during the March selloff, the Pound dived together with pretty much every other currency, bar the US dollar. But since then, sterling has rallied. This week it even reached the highs last seen when the Tories won the election in December 2019, above 1.35 to the US dollar. So that rally back is due more to greenback weakness and one only needs to look at the incredible gains for stocks and commodities this year to see that. There are talks of a huge infrastructure spending on both sides of the Atlantic and a weaker US dollar will keep the rally in place. So there is heightened expectation the GPBUSD has further to go.
Earlier today, the Bank of England’s Monetary Policy Committee (MPC) decide to leave the benchmark interest rate unchanged at 0.1% in a unanimous vote (9-0-0). As widely expected, the central bank also maintained the Asset Purchase Facility at £895 billion. Governor Andrew Bailey announced an expansion of the bond-buying scheme by $150 billion to quantitative easing during November meeting in a bid to boost UK’s stuttering economic recovery.
Growth has been reported to slow since the summer months, the second lockdown is now predicted to lead to a double-dip in GDP and the lingering Brexit saga undoubtedly does not help either. Lately, the Bank of England has reiterated that it is keeping open the possibility of setting negative interest rates and even made inquiries to assess how prepared are the commercial banks for such a scenario. Every time that happened the pound sterling took a dive so it remains a distinctive risk for the otherwise positive outlook against the US dollar going forward.
The Chart shows GBPUSD has just broken above the 30 months resistance at 1.35. The short-term moving averages have turned higher again after a short dip in September. The recent rally needs to be confirmed so it’s crucially important for the bulls the price remains above 1.35. If that comes true it could spur additional buying power and the next resistance at 1.375 may come into focus.
On the downside, sellers will want to push the price back below resistant turned support at 1.35 hoping that’s nothing but a false breakout. If they are successful then support at 1.325 roughly matching the 61.8% Fibonacci retracement could be tested sooner rather than later.