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Brexit in the week from 23/3 – 29/3/2020

Johnson caught the coronavirus. Fitch downgraded Britain's rating. PMI data in Britain fell to historically low levels in March. Negotiations on the Brexit Trade Agreement have been postponed due to the coronavirus pandemic. The risk of Brexit without a trade agreement as of December 31, 2020, thus increases because Britain does not want to extend the deadline. Yet the pound surprisingly strengthened last week. More details are in our article.

Fundamental analysis

Last week, Fitch Ratings has downgraded Britain from AA to AA- with the negative outlook because of uncertainty about the outcome of the EU-UK trade agreement and the weakening of public finances due to the coronavirus pandemic. Fitch expects the UK economy to decline by 4% thanks to coronavirus. At the same time, the agency expects the government debt-to-GDP ratio to increase gradually to over 100% after 2025.

Due to the negative outlook, further downgrading may follow. Downgrading is generally negative for the pound.

No negotiations on the EU-UK trade agreement have taken place due to the coronavirus pandemic. On Friday, Prime Minister Boris Johnson announced that he was also infected with coronavirus, so he works in isolation. There are already more than 19,500 infected in Britain, and according to some reports, it may take up to 6 months for Britain to return to normal life.

On Tuesday, Britain reported PMI data on purchasing managers’ activity, which clearly showed a deterioration in economic activity. In the manufacturing sector, PMI reached level 48 compared to the previous value of 51.7. In the service sector, which is very important for Britain, the PMI reached only 35.7 (the previous value was 53.2), which is historically the lowest value. By comparison, in the 2008 crisis, PMI in services reached a minimum of 40.1. 

The CPI, which was reported on Wednesday, reached 1.7% (the previous figure was 1.8%). The goal is to keep the CPI around 2%. The Bank of England expects CPI to decline by 1% in March. However, the cheap pound should gradually support price growth. Retail sales in the UK fell by -0.3% in February.

The Bank of England left its rate at 0.10% on Thursday. The asset purchase program remains at £ 645 billion. The Bank is ready to continue increasing the QE program if necessary.

The reason why the GBPUSD strengthened last week was extremely weak data from America. On Thursday, the US reported a record increase in unemployment, with the number of applicants who filed for unemployment insurance reached almost 3.3 million. In the crisis 2008-2009, the maximum number was 663 thousand.
 

Technical analysis as of March 22, 2020

Last week, a strong bullish candlestick was formed on the weekly chart, thus rejecting a further decline, adding a total of approximately 790 pips to the pound. The price closed at 1.2455. Overall, however, the pound is in a downward trend, as evidenced by the downward trend line between points A, B and C. At the same time, the line of support between points D and E was broken, creating a new lower low below the point E.
Figure 1: The GBPUSD on a weekly chart

On the daily chart, see Figure 2, we can see that the support we pointed out in the previous article (point H) held the price and the price is now correcting the previous bearish movement. It broke through the two closest resistance bands very easily, with no reaction. The last four candlesticks are strongly bullish and do not indicate yet that this correction should stop.

Overall, however, the pound is still in a downward trend, which is confirmed on the daily chart by the so-called death cross at point G, where EMA 50 (orange line) crossed below SMA 100 (blue line).
 
Figure 2: The GBPUSD on a daily chart
 

The key levels of support and resistance are:

Resistance 1 is in the band 1.2500 - 1.2570. The upper limit of the band is at EMA 50.
Resistance 2 is on the level of 1.2700 - 1.2750. At the same time there is a confluence with Fibo 61.8% of the distance between FH points here.
Resistance 3 is at 1.2860-1.2900. This is the level of the SMA 100 moving average. It is also the area from which the previous strong decline was initiated. It is therefore possible that the big players may want to re-initiate the bear movement from this area again.

Support 1 is located in the band 1.1400 - 1.1470.
Support 2 is in the band around the level 1.10. Strong psychological level.
Support 3 is a parity with the US dollar around 1.00, which is another strong psychological level.

As the market is generally in the downtrend, it seems preferable to look for short trades near resistance levels. However, the reversal of the current correction should first be confirmed by some bearish candlestick pattern, such as bearish engulf. It is also possible to wait for our Purple Extreme indicator to reach the upper blue band on the daily chart, which indicates that the pound is overbought.

In addition, we present the overall market sentiment which, according to the COT (Commitment of Traders) report, which is presented every Friday, shows that last week the big speculators reduced their long positions again as the number of contracts decreased from the previous 18,600 to 10,900. This is the third decline in a row, which could indicate that large speculators are beginning to be cautious about strengthening the pound. 
 

What awaits us this week?

Given the coronavirus pandemic, the next round of Brexit negotiations will take the form of a video conference. Meanwhile, Britain still declares that the deadline for the conclusion of the trade agreement will not be extended. However, reaching a complete agreement is unrealistic given the short time remaining until June 30, 2020. This is therefore currently a negative message for the pound.

The key macroeconomic data on consumer confidence in the economy and GDP for Q4 2019 will be reported on Tuesday in the UK. The information on the development of PMI in production will come on Wednesday, in construction on Thursday and in-services on Friday.

On Friday, US employment data for March will also be reported.  The strong volatility is expected in all pairs with the US dollar. Generally, these indicators are expected to worsen significantly.

In addition, the development of coronavirus contagion and the measures taken to contain the virus should be monitored on an ongoing basis.

 

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