Brexit in a week from 10/2 - 17/2/2020

While concerns about coronavirus are rising, the British Pound strengthened quite significantly last week, bouncing off key support after good fundamental economic data has been reported and the UK balance of payments has reached a positive level for the first time since 1985.  There were also changes in Boris Johnson's government which were accepted positively by the markets. Will there be reasons to further strengthening of the British Pound? More details can be found in our article.

Fundamental analysis

Last week was very positive for the Pound. First, data on GDP were reported on Tuesday, which reached 1.1% on a year-on-year basis. In the previous period, the figure was 1.2%, which is a deterioration, but on a monthly basis, GDP improved significantly (the current figure is 0.3% compared to - 0.3% last month). Data on monthly production also improved.  Current level is 0.3% compared to previous -1.6%.

A big change occured in the trade balance. Great Britain's net exports exceeded net imports and the balance of payments is positive, reaching £ 0.85 billion. The surplus of export over import occured for the first time since 1985. A positive trade balance  is often a bullish signal and could lead to a strengthening of the Pound. This, however, provided that there is no threat of Brexit without a trade agreement, which cannot be ruled out at the moment.

Then came Thursday when there was a change in the Cabinet as Boris Johnson replaced several ministers. Surprisingly,  the Finance Minister Sajid Javid also resigned and  was replaced by his current deputy Rishi Sunak. The Pound  weakened at first, but then it began to strengthen rapidly. This is because, with the change of the Minister of Finance, the markets have sensed the possibility of bigger government stimulus to support economic growth.  The markets seemed to welcome this change, which was reflected in a rise in government bond yields and a strengthening of the Pound.

However, this governmental change needs to be accepted with some caution. What was the real reason for resignation of Javid is not clear. Was it because Sajid Javid, for example, did not agree to larger government spendings so that Britain was not over-indebted? If Boris Johnson needed a minister to approve a higher investment, but at the expense of a high debt increase, then it could weaken the Pound. It will be more evident in March when the British Cabinet  discusses the budget. 

Technical analysis as at February 17, 2020

From the weekly chart, see Figure 1, we can see that last week was bullish when the price bounced off the level of support upwards. The previous bearish candlestick, however, was not overcome. The price moved in a range about 200 pips last week and closed at 1.3046.  

Figure 1: The GBPUSD on a weekly chart

On the daily chart, see Figure 2, we  can see the price bouncing upwards from the SMA 100 moving average. At the same time, we can see that the price closed above EMA 50 on Thursday, so the price is still in an upward trend, although it has been moving in a side consolidation since around mid-December.

On Friday, the Pound opened and closed at approximately the same price, while not overcoming the high of the previous candlestick, a signal of uncertainty. If the price fall below the SMA 100 moving average and the daily candlestick would close below it under the influence of various political expressions, this could be a signal to further decline. 
Figure 2: The GBPUSD on daily chart

The key levels of supports and resistances are:

Resistance 1 is in the band 1.3200 - 1.3280.
Resistance 2 is at level 1.3330 - 1.3510.
Resistance 3 is at a level of 1.3700 - 1.3790
Support 1 is now on the SMA 100 moving average in the zone around 1.2880 - 1.2900.
Support 2 is located in the band 1.2780 - 1.2820.
Support 3 is in the range around 1.2530 - 1.2580. This level is breaking through previous resistance.

In addition, we mention the overall sentiment of the market, which according to the COT (Commitment of Traders) report, which is presented every Friday, shows that last week, large speculators have increased their long positions after a previous decline as the number of contracts increased from 13,000 to 21 100, which is bullish signal.

What awaits us next week?

From a macroeconomic perspective, this week will be very busy for the Pound. Firstly, employment data will be reported on Tuesday, inflation data will be presented on Wednesday, retail sales on Thursday  and PMI data on purchasing managers activity, which is highly expected, will be presented on Friday. The last PMI was very positive, we will see if the trend is confirmed. Investors will also speculate whether a change of finance minister will lead to more aggressive investment incentives.

Outside the UK, it will be interesting to see data from the Eurozone, which may indicate the first effects of coronavirus on the economy. German ZEW on Tuesday and consumer confidence on Thursday and especially PMI data on Friday will surely attract much attention. 
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