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Brexit in the week from 30/3 – 5/4/2020


What is currently moving the markets is not Brexit, but the coronavirus. The Brexit negotiators are quarantined, so the Brexit negotiations are stopped. By the end of June, the parameters of the trade agreement must be clear, but this is not in sight yet. The risk of Brexit without agreement as of December 31, 2020 is therefore increasing. Meanwhile, economic indicators in Britain signaled a strong deterioration in the economic situation. At the same time, the number of the coronavirus cases is on the rise. More details in our article.

Fundamental analysis

There are more than 48,000 infected in Britain and it shows how strongly Britain initially underestimated the situation by failing to make effective testing in time. Brexit may be the reason why people testing was not initiated earlier. According to some analysts, the British government did not want to show how much Britain is dependent on the EU. The situation began to calm after the Minister of Health declared that Britain would conduct 100,000 tests a day, ten times more than at the end of March.

In any case, Brexit causes problems in solving this pandemic in Britain, both from a practical and political perspective. Until June 30, 2020, the British government can ask the EU to extend the deadline for negotiating a trade agreement if it is clear that it is not possible to conclude the agreement by the end of the year. However, the request for an extension of the deadline may be a major political defeat for Prime Minister, because if it is extended to 2021, it will mean another year where Britain will have to contribute to the EU budget, but without the possibility of influencing the EU policy.

However, from a practical point of view, there are strong reasons for extending the deadline, as Britain is importing a large number of medical and sanitary supplies from the EU needed to deal with the pandemic. However, if the EU-UK agreement is not negotiated and the term is not prolonged, a trade between the EU and Britain will be subject to WTO tariffs after December 31, 2020 and a no-deal Brexit scenario will happen. This will make European imports more expensive in Britain and probably delays in supply too. 

In any case, the current situation is that due to the coronavirus, negotiations on the EU-UK trade agreement have been halted and the planned videoconference has not taken place. The EU negotiator, Michael Barnier, has contracted COVID-19 and his British counterpart, David Frost, is quarantined after showing symptoms of infection. Boris Johnson was also hospitalized with coronavirus.

From the important macroeconomic data point of view, UK consumer confidence data in the economy was reported on Tuesday, better than expected, reaching -9 versus expectations – 15.    GDP for Q4 2019 is 1.1%, in line with expectations of analysts. PMI indicators showed a deterioration in the British economy. PMI in production reached 47.8 (previous month it was 51.7), PMI in services fell to 34.5 (previous month 53.2).

More record data came from the USA, when the number of claims for unemployment insurance exceeded 6,600 thousand and increased by 100% compared to the previous week. On Friday, NFP data on the labor market negatively surprised, when the value of - 700 thousand was significantly worse than expected (- 100 thousand jobs). The US economy is undergoing the largest shock in modern history, which most likely will intensify in upcoming weeks.

Surprisingly, however, the US dollar started to appreciate in response to such weak US data, while the pound weakened on Friday. The reason for this is that the US dollar is considered a strong reserve currency in times of crisis, while the pound currently has rather bearish outlooks due to the uncertainty surrounding Brexit. 

Technical analysis as at April 5, 2020

The price moved in a narrow band of 270 pips last week. The week ended with a bearish candlestick that resembles an inside bar. The pound closed at a price of 1.22689. Overall 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 point E. 
 
Figure 1: The GBPUSD on a weekly chart

The daily chart, see Figure 2, shows that last week the price consolidated. If the price breaks up and the daily candlestick closes above the consolidation region, the price could rise further to the next level of resistance. If the daily candlestick closes below this range, this could indicate a further decline. The downward trend is confirmed 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 resistances are:


Resistance 1 is in the band 1.2500 - 1.2570. The upper limit of the band is on EMA 50.

Resistance 2 is in the region 1.2700 - 1.2750. At the same time there is confluence with Fibo 61.8% of the distance between FH points.

Resistance 3 is in the zone 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 band around level 1.10. Strong psychological level.

Support 3 is a parity with the dollar around 1.00, another strong psychological level.

As the market is generally in a downtrend, it seems preferable to look for trades in the short direction near resistance levels. It is also possible to wait for our Purple Extreme indicator to reach the upper blue band on the daily chart, which indicates overbought and then begins to decline.
In addition, we present the overall market sentiment according to the COT (Commitment of Traders) report, which is presented every Friday:
 
COT report
Instrument Data as at
3/4/2020
Data as at 
27/3/2020
Data as at 20/3/2020 Data as at 13/3/2020 Sentiment
The British pound 5000 10 900
18 600
 

26 300
 
Weak bullish
The USD index 14 100 12 500 7 200 12 400 Strong bullish

Last week, big speculators lowered overall net positions on the British pound. This is the fourth decline in a row. Speculators, on the other hand, strengthened positions on the US dollar that, despite bad macroeconomic data in the US, confirms the dollar as a strong reserve currency in times of crisis.

 

What awaits us this week?

It is not known yet when the next rounds of the trade agreement negotiations will take place.

Based on important macroeconomic data, Halifax House Price Index will be reported in the UK on Tuesday. On Thursday data on GDP, industrial production and trade balance will be presented.

The US will also report on unemployment benefits again on Thursday. Last week, the response to bad US data was surprising and the dollar strengthened. We'll see if a similar reaction will happen again this week.

In addition to that, the development of the coronavirus contagion and the measures taken in this context should be monitored on an ongoing basis. 
 

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