Brexit in a week from 2/3 – 8/3/2020

The first week of negotiations on a trade deal between the EU and the UK showed significant divergences and confirmed that further negotiations will not be easy at all.  Yet, the GBPUSD strengthened strongly to 1.3050 last week and is currently testing the closest resistance. But moving averages created a bearish constellation of the death cross. Will this signal be confirmed and the pound will decrease depending on what budget will be presented on Wednesday?

Fundamental analysis

The first week of negotiations on a trade deal showed significant divergences in some key areas as for example fishing, law enforcement, and the EU standards. The EU wants to use the Court of Justice of the European Union as an ultimate arbiter in the case of disputes but the UK does not want it.  The UK also does not want to follow EU standards.   Regarding fishing, the EU wants to hold current rights but the UK proposes a different model where the UK would have full control over its fishing waters.

So what the future trade deal will look like we do not know yet.  We also do not know how the coronavirus will influence all negotiations in the future.  The negotiating teams did not discuss what they would do in that case.  We just know that they stopped shaking hands, just in case. 
Last week we learned from the British press that Brexit administration had cost Britain £ 4.4 billion so far. Information about these costs was kept secret from the British public. The report came when the Conservative party member Duncan Smith leads a rebellion in the party over Huawei's role in the UK 5G network.

From a macroeconomic point of view, last week was relatively busy for the British pound. On Monday, PMI data in the manufacturing sector were reported, reaching 51.7 compared to the previous 50. PMI in the construction sector reached 52.6 compared to the previous 48.4.  PMI in the service sector, that is very important for the UK reached 53.2 compared to the previous 53.9. Overall, the PMI was positive and this was probably one of the reasons why the pound strengthened last week.

Another reason for strengthening the pound last week was that on Tuesday, the US Fed dropped surprisingly the key rate from 1.75% to 1.25% in response to support the economy in the current coronavirus epidemic. In addition, it is possible that the further rate cut which is strongly supported by President Trump will continue.

The GBPUSD currency pair is also influenced by US data. Last Friday, employment data was reported in the United States, which was very good when the Non-farm payrolls (NFP) indicator, which shows a change in employed persons except the agricultural sector, reached 273,000 compared to the expected 175,000. However, in the current atmosphere of potential rate cuts, it had no major effect on the USD.

Technical analysis as of March 8, 2020

From the weekly graph, see Figure 1, we can see that last week was strongly bullish, the price bounced off the support level and closed above the high of a previous weekly candlestick. The price moved in the range of approximately 310 pips last week and closed at 1.3047. 
Figure 1: The GBPUSD on the weekly chart

On the daily chart, see Figure 2, we can see that the price closed at the first resistance level as of March 6, 2020, but at the same time above the moving average of SMA 100, below which it remained for the previous seven days. The moving averages formed a bearish constellation of the so-called death cross, see the point M,  because the EMA 50 (orange line) crossed below the SMA 100 (blue line). From a technical analysis point of view, this bearish signal often indicates a further decline. 

It will be important to see how the price will react to the current resistance level. 
Figure 2: The GBPUSD on the daily chart

If the price reverses at the current level of resistance, it could fall again to 1.2750 this week. If current resistance breaks, we could expect a price increase to at least 1.3200.

The key levels of support and resistances are:

Resistance 1 is in the band 1.3040 - 1.3070.
Resistance 2 is at the level of 1.3200 - 1.3280.
Resistance 3 is on the level 1.3330-1.3510.
Support 1 is located in the band 1.2720 - 1.2750.
Support 2 is in the range around 1.2530 - 1.2580. This level is a break of the previous resistance.
Support 3 is in the band 1.2180-1.2200.

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 continued to accumulate their long positions as the number of contracts increased from the previous 29,600 to 35,200. Speculators continue to trust the pound and expect it to strengthen. 

What awaits us this week?

Negotiations will continue with preparation for another round of talks between the EU and the United Kingdom in the form of the trade agreement. The United Kingdom has indicated that it is ready to trade with the EU under WTO rules and thus to introduce tariff barriers if the EU proposals are likely to jeopardize the UK's sovereignty. This attitude is rather negative for the pound.

On Wednesday, the Chancellor Rishi Sunak will present his first budget, which will make it clear how the government has decided to stimulate the economy in response to the coronavirus epidemic, which is beginning to show itself more strongly in Britain. The exact time of budget discussion is not set yet, but in any case after the budget presentation, the pound can be expected to be highly volatile.

On Wednesday, there will also be presented data on the GDP, the production output and the balance of payments, which in the last two reporting periods has changed significantly in favor of exports, causing the growing demand for the pound.


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