Brexit in the week from 20/4 – 26/4/2020

Another round of Brexit talks took place last week, but no significant progress has been made. At the same time, economic data on PMI has fallen to new historic levels, confirming that coronavirus is decimating the British economy. The positions of large speculators are negative on the pound for the first time since January 6, 2020. Will the bearish sentiment on the pound continue?

Fundamental analysis

There are already more than 152,000 COVID-19 cases in the UK. Restrictions on the movement of persons in Britain came into force on March 23. Since April 11, 2020, there is a constant increase in newly infected people at around 5,000 cases per day so the disease is not under control yet. The Cabinet is legally bound to decide on May 7, 2020, on modification or prolongation of current lockdown measures.  Johnson, who is returning to work after recovery, may accelerate loosing of the measures before that date if the situation supports such a decision. 

As for Brexit, the second round of video conference talks took place last week. EU officials increasingly believe that the Brexit transition period will need to be extended. Firstly, because no significant progress has been made in key areas such as fisheries or solutions to legal disputes. Furthermore, the coronavirus has a very negative impact on the world economy, so another risk in the form of uncontrolled chaotic Brexit without a trade agreement could bring the global crisis to an even deeper level.

An application for an extension of the transition period must be submitted by June 30, 2020. Number 10 has so far claimed that he is not considering the prolongation of the Brexit transition period because he wants to get Brexit done as soon as possible. The extension of the transition period could be a significant political defeat for Johnson. 

In Britain, labor market data was reported on Tuesday, where average earnings fell to 2.8% (previous month 3.1%) and unemployment rose to 4% (previous month 3.9%). The number of unemployed increased by 12,100 month-on-month, which was significantly less than the expected increase of 172,000. The CPI for March fell to 1.5% year-on-year (it was 1.7% in February).

On Thursday, Britain reported a record drop in PMI in services from the previous value of 34.5 to 12.3. The services make up 80% of the British economy. A value of less than 50 indicates a contraction of the economy. The March drop in retail sales to -5.1% (previous month -0.3%) only illustrated the current economic disaster.

In the USA, a further increase in claims for unemployment benefits was reported. Another 4.4 million unemployed in the United States applied for support last week. In total, more than 26 million unemployed people have already applied for support since March 19, 2020. The US dollar, however, has kept its strength.

Technical analysis as at April 26, 2020

Last week, the pound moved in the 250 pips band and ended the week at 1.2364 when it closed below the closing price of the previous week. Overall, the pound is in a declining trend, which is confirmed by a trend line between points A, B, and C. At the same time, the support line between points D and E was broken and a new lower low was created below point E, see Figure 1.

Figure 1: The GBPUSD on a weekly chart

On the daily chart, see Figure 2, we can see that the price continued to decline after breaking the rising line, which is determined by HI points. The reader can also see this pair on the 4H chart, where he will see that the moving average EMA 50 fell below SMA 100 last week, which is another confirmation of the downtrend. The upper border of the current declining trend is defined by the trend line between the FJ points.

If a long bearish candlestick, which would close below 1.2240, was formed on the daily chart on Monday, a continuing bear formation so-called Falling three methods would occur, and the decline in the GBPUSD might continue especially after breaking support 1. 
 
Figure 2: The GBPUSD on a daily chart
 

The key levels of support and resistances are as follows:
 

Resistance 1 is at the level of 1.2480 - 1.2520. Here, there is a monthly Fibo 61.8% of the FH movement that occurred in March. At the same time, 1.2500 is a psychological level.
Resistance 2 is at the level of 1.2620-1.2650. It's a swing at a point J.
Resistance 3 is in the zone 1.2700 - 1.2750.

Support 1 is located in the range of 1.2150 - 1.2230.
Support 2 is in the range around the level of 1.1980 - 1.2000. Here, there is a low border of the hidden gap on the candlestick formed on March 26, 2020.
Support 3 is around the zone 1.1400 - 1.1470.

Since the market as a whole is in a downtrend, it seems more appropriate to look for trades in the short direction near resistance levels, where it is then appropriate to wait for a confirmation. Last time we showed a hypothetical example of short speculation with a volume of 0.01 lot with an entry at a price of 1.25. With a target price of 1.2170, the transaction would bring a profit of CZK 820. The stop loss would be above the last high, which is 1.2653. In monetary terms, the trader would risk CZK 380. The target price has not been reached yet, we'll see if it happens this week.

 

COT report


In addition, we present the overall market sentiment, which according to the COT (Commitment of Traders) report, which is presented every Friday, shows the following data:
 
COT report
Instrument Data
24/4/2020
Data 17/4/2020 Data
10/4/2020
Data 3/4/2020 Data 
27/3/2020
Sentiment
The British pound -1,400 3,200 3,700
5,000
 

10,900
 
Bearish
The USD index 15,600 15,400 15,000 14,100 12,500 Strong bullish

Last week, large speculators again reduced the overall position on the British pound. This is the seventh decline in a row and for the first time since January 6, 2020, the overall net position is negative, so bearish sentiment prevails on the pound. Speculators, on the other hand, strengthened their overall net position on the US dollar for the fifth week in a row, which, despite poor macroeconomic data in the US, confirms that the dollar serves as a strong reserve currency in times of crisis.

 

What awaits us this week?

Prime Minister Johnson is returning to office. His statements on a possible extension of the Brexit transition period will be closely monitored. The next rounds of negotiations on a trade agreement between the EU and Britain are then tentatively scheduled for May 11 and June 1.

An auction of 10-year bonds will take place in Britain this week on Tuesday. Bond yields have been falling steadily since January, reflecting continuing uncertainty about the future development of the British economy. Consumer confidence and the Nationwide House Price index will be reported on Thursday. PMIs in production will be reported on Friday.

In the USA, data on consumer confidence will be reported on Tuesday. GDP for 1Q 2020 will be reported on Wednesday, and a Fed meeting, where interest rates will be decided, will happen on the same day. 

Further development of claims for unemployment benefits will be reported on Thursday. Major companies such as Apple, Facebook, Google, Exxon, Shell and others will report results this week as well. If the data is bad, the US dollar as the world's reserve currency might benefit from that. 

In addition, there is a need to continuously monitor the further development of the spread of coronavirus disease and the measures taken in this regard. 
 

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