Brexit in a week from 18/2 - 23/2/2020

Last week, Great Britain surprised by very good macroeconomic data. The pound, however, did not react much to them and tended to balance on significant support. Will it break through and weaken this week? Or will consolidation continue in the upward trend? More details in our article.

Fundamental analysis

Last week was very positive for the British pound. Firstly, data on employment were reported on Tuesday, when the number of unemployed was 5,500 persons compared to the expected 22,600 persons. At the same time, the change in employed persons reached the level of 180 thousand compared to the expected 145 thousand.

Inflation data also pleasantly surprised when inflation reached 1.8% on a year-on-year basis (1.3% in the previous period). Retail sales data were presented on Thursday, with a month-on-month increase of 0.9%  compared to the previous 0.5%. Friday's PMI data were also very positive, with the PMI in manufacturing reaching 51.9 (50.0 in the previous period) and PMI in services was 53.3 (53.9 in the previous period).

Outside the UK, it was interesting to watch Eurozone data. The German economic sentiment indicator ZEW stood at 8.7 and shows a deterioration in confidence in the economy compared to the previous period when it reached 26.7. PMI data from the euro area, on the other hand, were very surprised when the PMI in manufacturing reached 49.1 (in the previous period it was 47.9) and in the service sector reached 52.8 compared to the previous 52.5.

But the British pound did not respond very positively to these positive data. The main reason for this is that Britain has so far declared its readiness to trade with the EU under the terms of the World Trade Organization (WTO) after the end of the transition period, which would mean the introduction of tariff barriers. If this rhetoric continues, the pound will be negatively affected and the potential for its strengthening is limit. 

Technical analysis as of February 23, 2020  

From the weekly chart, see Figure 1, we can see that last week was bearish and the price broke below the low of last week's candlestick. The price moved in a range of about 200 pips last week and closed at 1.2955.  
Figure 1: The GBPUSD on the weekly chart

On the daily chart, see Figure 2, we can see that the price closed below the moving average of the SMA 100 on Thursday, but on Friday, a bullish candlestick was created and returned above this significant support, where it closed the Friday session just above it. Thus, the price is still in an upward trend, although at the moment it has been in some consolidation since mid-December.

Should the price fall below the moving average of SMA 100 due to various political expressions and the candlestick would close again below it, this could be a signal of further decline, especially if the price at the same time breaks the horizontal support barrier on the level 1.2780.
Figure 2: The GBPUSD on the daily chart

The key levels of support and resistance are:

Resistance 1 is in the band of 1.3040 - 1.3070.
Resistance 2 is at the level of 1.3200 - 1.3280.
Resistance 3 is at level 1.3330-1.3510
Support 1 is now on SMA 100 moving average 1.2930.
Support 2 is located in the band 1.2760 - 1.2820.
Support 3 is in the range around 1.2530 - 1.2580. This level is a break of previous resistance.

In addition, we show 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 as the number of contracts increased from 21,100 to 29 300.

What awaits us this week?

From a macroeconomic perspective, this week will be calmer for the British pound. A data on approved mortgages will be reported, information on 10-year bonds will be auctioned on Tuesday, and an index of the change in the price of properties sold will be announced at the end of the week.
However, more turbulences may come in relation to the status of coronavirus issue. 
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