Brexit in a week from 16/3 – 22/3/2020

The Pound sterling broke a significant level of support last week and the GBPUSD fell below 1.1500. Negotiations on the Brexit Trade Agreement are now postponed due to the coronavirus pandemic. The risk of Brexit without a trade agreement as of December 31, 2020 is thus increasing.

Fundamental analysis

For the second week, coronavirus has decimated the British pound hard and the infection is beginning to spread at a rapid rate in Britain. The current crisis has not allowed the second round of talks on the EU-UK trade agreement to happen. The essential features of a trade agreement with key parameters should be agreed by June 30, 2020 in order to be able to complete the ratification process so that Brexit with a trade agreement would take place on December 31, 2020.

Because Boris Johnson sees no reason to extend the Brexit deadline,  the risk of Brexit without a trade agreement thus increases. The markets are aware of this and therefore the British pound has weakened sharply. Until current fundamentals change, this trend is likely to continue.
On Tuesday, Britain reported data on employment that were better than expected. Average earnings grew by 3.1% (previous 2.9%), with the number of unemployed reaching 17,300 against the expected 21,400. However, these data are reported for January and February periods, where the restrictions on the coronavirus pandemic are not reflected yet.

Very important information is that the Bank of England again reduced the rate, which is now 0.10%.

Technical analysis as of March 22, 2020

If we had written in the previous article that the pound made a mega-drop, now we can say that it made a super-mega-drop last week. What is happening in the markets at the moment is literally panic, where it seems no principles of technical analysis work. The pound weakened by another 630 pips in a week and it lost a total of 1430 pips in two weeks overall. Amazing is not only the movement itself but also the ease with which the price passes through the various support barriers.
Figure 1: The GBPUSD on a weekly chart

In the daily chart, see Figure 2, we can see that the price reached the level of Fibonacci extension 127.2%. It seems that the price has stopped at this level and new support could be created here. It is also the price of around 1.15, which is a round number and a psychological level. The last candlestick on Friday approached the resistance line and fell back down again.

Currently, from a technical analysis point of view, there is a strong bearish sentiment, which is confirmed by the so-called death cross at point F where the EMA 50 crossed  below the SMA 100.
Figure 2: The GBPUSD on a daily chart

What matters now is whether the current support holds the price. If so, the pound could make some correction to some of the resistance levels, where it might be a place to consider short trades. If support breaks, we expect price to drop to another psychological level 1.10.

The key levels of supports and resistances are:

Resistance 1 is in the band 1.1950 - 1.2020. Especially 1.20 is important psychological level.
Resistance 2 is in the zone 1.2180 - 1.2200.
Resistance 3 is on the level 1.2540-1.2570.
Support 1 is located in the band 1.1400 - 1.1470. Here, there is a Fibonacci extension 127.2%.
Support 2 is in the region around the level 1.10. Here, there is Fibonacci extension 161.8%.
Support 3 is a parity with the USD around a psychological level 1.00

In addition, we present the overall sentiment of the market, which, according to the COT (Commitment of Traders) report, that is presented every Friday, shows that last week the big speculators reduced their long positions as the number of contracts decreased from the previous 26,300 to 18,600. The decrease of positions could suggest that large speculators are beginning to be cautious about strengthening of the pound. This is the second reduction of long positions in a row.

What awaits us this week?

The next round of Brexit negotiations is now postponed due to the coronavirus pandemic. Given the short time initially set for the negotiation of the trade agreement, this is currently a negative news for the pound.

Regarding macroeconomic data, the PMI data will be reported in Britain on Tuesday. On Wednesday, there will be presented the inflation data and on Thursday we will see the retail sales. There is also planned another meeting of the Bank of England on Thursday when a high volatility can be expected.

In addition, the traders will monitor the development of coronavirus contagion very carefully.

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