Brexit in a week from 9/3 – 15/3/2020

The British pound experienced a free fall last week and dropped by an incredible 800 pips. The blend of uncertainty about negotiating a trade agreement with the EU and the growing coronavirus pandemic was too much for the GBPUSD. At the same time, the Bank of England surprised by the unexpected rate cut. However, the US Fed also responded and pulled out a bazooka to fight the coronavirus, unexpectedly lowering rates from 1.25% to 0.25%. Will it stop further pound drops?  

Fundamental analysis

Last week, the EU and Britain agreed to postpone the next round of negotiations on a trade agreement in view of the coronavirus pandemic. Brexit is currently in the shadow of coronavirus infection.

Meanwhile, Boris Johnson has decided to take the risk, and unlike other European countries where the goal is to restrict the movement of people, such radical measures are not currently being taken in Britain. It is based on scientific conclusions that in the long term it should be beneficial for society to build up group immunity against coronaviruses. Which practically means exposing society to contagion and to deal with it naturally. The assumption is that in most cases the disease is not fatal.

From a macroeconomic perspective, two things were the most important last week. First, on Wednesday, the Bank of England surprisingly lowered the rate from 0.75% to 0.25%. This was a step that the bank justified by the need to respond to the current economic shock caused by a coronavirus. On Wednesday, GDP data remained below expectations, with GDP reaching 0.6% on a year-on-year basis (analysts expected 0.9%) and on a month-on-month basis, GDP reached 0.0% (expectations were 0.2%).

The biggest surprise came on Sunday at 10:00 p.m. The US Fed did not wait for Wednesday's scheduled meeting and lowered its key interest rate by 1%  from 1.25% to 0.25%. This is due to the current risks associated with coronavirus infection. This could have a positive effect on couples with USD in the short term. Overall, however, the British pound is still under pressure in our opinion. 

Technical analysis as of March 15, 2020

What we experienced in the market last week is rare to be seen. The pound made a super crash  and weakened by 800 pips in a week, closing at 1.2279. From the weekly chart, see Figure 1, we can see that the price has stopped at the level of significant support, which is defined by the decreasing line between points A and B and now it stopped at point D. 

Figure 1: The GBPUSD on the weekly chart

In the daily chart, see Figure 2, we can see that the price has reached the level of Fibonacci retracement of 78.6%, which is defined between the low of September 3, 2019 and the high of December 13, 2019. At the same time, we are at a significant level of horizontal support at around 1.22. This, along with point D of the weekly graph, is an interesting confluence of the two signals. Currently, however, from a technical analysis point of view, the GBPUSD is bearish, which is confirmed by the so-called death cross at point F when the EMA 50 crossed below the SMA 100.
Figure 2: The GBPUSD on the daily chart

What matters now is whether the current support will hold the price. If so, the pound could make some correction to some of the resistance levels after the last week fall, where it would then be ideal to consider short trades.

The key levels of supports and resistances are:

Resistance 1 is in the band 1.2720 - 1.2750.
Resistance 2 is at the level of 1.2950 - 1.2970. Around this level, there is a moving average of the SMA 100, which often functions as a resistance.
Resistance 3 is at 1.3200-1.3280.
Support 1 is located in the band 1.2260 - 1.2300. Here is Fibonacci retracement 78.6%.
Support 2 is in the range of around 1.2180 - 1.2200.
Support 3 is in the band 1.1950-1.2020.

In addition, we present the overall market sentiment which, according to the COT (Commitment of Traders) report, presented every Friday, shows that last week large speculators reduced their long positions as contracts fell from the previous 35,200 to 26,300. The reduction of positions could suggest that large speculators are beginning to be cautious about strengthening the pound. We will see at the end of the week whether this trend will continue.

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 negative news for the pound.
Employment data will be reported in Britain on Tuesday from important macroeconomic data. However, it will be more important to follow the further development of the spread of coronavirus infections on the islands and whether the government will eventually take restrictive measures, as elsewhere in Europe.

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