Brexit in a week from 3/2 - 9/2/2020

Hardly had the UK left the EU formally, Prime Minister Boris Johnson began last week with strong rhetoric, warning that he might  introduce customs duties on EU import. The pound responded to that  by a drop of 200 pips on Monday. Will further depreciation of the pound sterling continue?

Fundamental analysis

The British Prime Minister said last week that the UK would not adopt EU rules on competition, ecology, subsidies, etc. He also stated that if the EU insisted on them as a condition for concluding a trade agreement with free access to the EU market, he will introduce customs and tarrifs. He also said that he would like to use the EU-Canada treaty for a possible agreement with the EU. However, according to some analysts, this may not be appropriate for relations with Britain as, for example,  it does not address service areas, which  make up 80% of British GDP.

From macroeconomic data, last week, a set of data was reported on Purchasing Managers' Indices (so-called PMI indices) in the manufacturing sector, which reached a value 50 compared to the previous 47.5, in the construction sector, where the index reached 48.4 compared to the last 44.4. The PMI in services  improved from the previous 50 to 53.3, which is the best level since October 2018. As the UK's GDP is 80% of the service, this indicator is very important in anticipating further developments.

Although macroeconomic data were very good and confirmed an improvement in economic activity, it remained in the shadow of Johnson's statement that sent the pound sterling down. From the weekly perspective, positive PMI data had no effect on the movement of the British currency. 

Technical analysis as at February 9, 2020

From the weekly chart, see Figure 1, we can see that the last week was strongly bearish. This move was initiated by Boris Johnson's statements on the possibility of introducing tarrifs. The price was in the range of approximately 300 pips last week and closed at 1.2884. 
Figure 1: The GBPUSD on the weekly chart

On the daily chart, see Figure 2, we can see that although the price is still in an upward trend, the latest developments from the past week suggest that the pound sterling might weaken because the price broke the support line of growing channel. Furthermore, the price broke through the moving average of the EMA 50 and closed below it. The pound has now reached the level of support, which is the SMA 100 moving average. 
Figure 2: The GBPUSD on the daily chart

It will be crucial whether or not the SMA 100 will hold the price as a support. A hindsight indicates that if the price closed below or above the SMA 100, it usually continued in that direction. However, a recent Boris Johnson’s speech speaks in favor of further downturn as it suggests that a trade agreement might not be concluded. If the agreement is not concluded during the transitional period, then Brexit without an agreement will happen and this situation could send the pound below 1.20.

The ideal scenario for short trades would be to to wait for the price to return to the level of 1.30, where the moving average is EMA 50 and then bounce downwards.

Resistance 1 is at the level around 1.3000 - 1.3020.
Resistance 2 is in the band 1.3260 - 1.3280.
Resistance 3 is at the level 1.3330 - 1.3510.
Support 1 is now at the moving average of 1.2880.
Support 2 is located in the band 1.2780 - 1.2820.
Support 3 is in the range around 1.2520 - 1.2570. This level is breaking through previous resistance.

Moving averages are also important support and resistances.

In addition, we present the overall sentiment of the market, which according to the COT (Commitment of Traders) report, which is presented every Friday, shows that last week large speculators reduced their long positions again as the number of contracts decreased from the previous 17,700 to 13,000. The decline could indicate that large speculators do not believe in further strenghtening of the pound too much. This decline could materialize if further negative talks on tarrifs continue. 

What awaits us next week?

From a macroeconomic perspective, data on GDP and production output will be reported on Tuesday. The trade balance data will also be closely monitored.

As for Brexit itself, the UK is in a transitional period that will last at least until the end of this year.  During this period it will be important to follow the statements of Boris Johnson. Further negative comments on the possible introduction of tariffs could trigger stronger pound fluctuations. Coronavirus could also have a negative impact on the pound, especially on GBPUSD and GBPJPY, which could weaken as a result of virus impact on the economy. 


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