Brexit in the week from 27/4 – 3/5/2020

There were no official negotiations on a trade agreement last week. As there are still differences between Britain and the EU on key issues, the risk that Brexit will occur without an agreement as of January 1, 2021, continues to grow. Economic data confirms the negative outlook for the British economy, and big speculators have once again increased their bearish position on the pound. Will we see a weakening of the pound this week?

Fundamental analysis

There are already more than 182,000 COVID-19 cases in the UK. Restrictions on the movement of persons in Britain came into force on March 23. Since April 11, 2020, the increase in new cases is constant at an average level of around 5,000 cases per day. Johnson said last week that the government would discuss a plan to relax restrictive measures in the week of May 4, 2020.

As for Brexit, there were no official negotiations on a trade agreement last week. The next round of talks is tentatively scheduled for May 11, 2020. EU negotiators continue to believe that Brexit's transition period will need to be extended. An application for an extension of the transition period must be submitted by June 30, 2020. However, the UK government is still not considering extending the deadline. If the transition period is not extended and the trade agreement is not concluded in time, Brexit will take place without an agreement as of 1.1.2021.

An auction of 10-year bonds took place in Britain last week on Tuesday, a yield of 0.26% was achieved. Bond yields have been falling steadily since January, reflecting continuing uncertainty about the future development of the British economy. The Nationwide House Price Index rose by 3.7% year on year basis (from 3.0% in the previous month). On Friday, the PMI in production was reported, where the value reached 32.6 (47.8 for the previous month). Such a low value confirms the negative outlook for the British economy.

In the US, consumer confidence fell to 86.9, reflecting concerns about unemployment. 3.8 million people applied for unemployment benefits. The Fed left rates at 0.25% on Wednesday and reported the expected unprecedented slowdown in the economy in 2Q 2020.
 

Technical analysis as at May the 3rd, 2020

Last week, the pound was in the 290 pips band and ended the week at 1.2494. Overall, the pound is in a declining trend, which is confirmed by the declining 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 a 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 has crossed the trend line between FJ points and stopped at the marked level of resistance, which we identified in the previous article. It seems that the price wants to consolidate in the range of 1.22-1.26, in which the pound fluctuated throughout the month of April. If the current resistance is maintained, then the price could fall to the nearest level of support. The overbought phase of the instrument, which is indicated by the Purple Extreme indicator, is signaling a decrease in the price.

Last time we also showed a hypothetical example of short speculation with a volume of 0.01 lot with an entry at a price of 1.25 when, with a target price of 1.2170, the transaction would bring a profit of EUR 30. The stop loss would be above the last high, which is 1.2653. In monetary terms, the trader would risk EUR 14. The target price has not been reached yet, we'll see if it happens this week. 
 

Figure 2: The GBPUSD on the daily chart
 

The key levels of support and resistances are as follows:

 

Resistance 1 is at the level of 1.2620-1.2650. It's a swing at the point J.
Resistance 2 is in the zone 1.2700 - 1.2750. At the same time, there is a moving average of SMA 100, which often reacts as a resistance.
Resistance 3 is in the range of 1.2780 - 1.2850. Here, Fibo 78.6% of the FH movement is. At the same time, there is the upper edge of the hidden gap from the candle formed on March 12, 2020.

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 the bottom edge of the hidden gap on the candle formed on March 26, 2020.
Support 3 is around 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.

 

COT Report


Additionally, we present the overall sentiment of the market, which according to the report COT (Commitment of Traders), which is presented every Friday, brings the following information:
 

COT report
 
Instrument Data as at 1/5/2020 Data as at
24/4/2020
Data as at
17/4/2020
Data as at 10/4/2020 Data as at
3/4/2020
Sentiment
British pound -6 700 -1 400 3200 3700 5000 Strong bearish
USD index 16 100 15 600 15 400 15 000 14 100 Strong bullish

Last week, big speculators again reduced the overall position on the British pound. This is the eighth decline in a row, so bearish sentiment prevails on the pound. Speculators, on the other hand, strengthened their overall net position on the US dollar for the sixth 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?

As for Brexit, the next round of talks is scheduled for May 11, 2020, so preparations will take place this week.

The British PMI in services will be reported on Tuesday. The data of this indicator for the previous period reached a record low level of 12.3. The indicator is a very important barometer of further development, as services account for 80% of GDP in Britain. PMIs in construction will be reported on Wednesday. A meeting of the Bank of England is scheduled for Thursday, the bank is expected to keep the key interest rate at 0.10%.

From US data, Thursday will show how much the increase in applications for unemployment benefits continues. On Friday, information on NFP data, where 21 million jobs are expected to be lost, together with an expected 16% unemployment, will confirm the state of the labor market in the US.

In addition, further developments in the spread of coronavirus disease and the measures taken in this regard need to be monitored on an ongoing basis. 
 

 

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