Brexit in the week 4/5 – 10/5/2020

Another round of talks between the UK and the EU on a trade agreement should take place this week. We know from previous negotiations that there are significant discrepancies in fundamental issues that threaten the deadline for concluding a trade agreement by December 31, 2020. We'll see if this week brings a breakthrough.

Fundamental analysis

There are already more than 219,000 COVID-19 cases in the UK. The positive news is that the number of new cases has begun to decline. Boris Johnson announced a plan to ease some restrictive measures. For example, from Wednesday, everyone who cannot work from home is motivated to start going to work.

As for Brexit, another round of trade agreement talks should take place this week. Despite growing concerns that the trade agreement will not be possible to negotiate due to a short time, the British government is not considering extending the transition period yet. A request for an extension of the transition period must be submitted by June 30, 2020. 

Last week, Britain reported a PMI in services for April, which reached a new record low of 13.4 (the previous month was 34.5) and PMI in construction that fell to 8.2 (39.3 in March). The Bank of England kept rates at the current level of 0.10%.

The central bank expects a sharp drop in GDP in 2Q 2020 with a sharp rise in unemployment. The bank states that this year the economy could fall by 14%, which would be the biggest decline in the last three centuries. The outlook for the economy is uncertain and it will depend on the development of the pandemic. The central bank will support the economy by providing liquidity totaling £ 645 billion. Next year, the bank expects a strong recovery and GDP growth of 15%.

Technical analysis as at May 10, 2020

Last week, the pound moved in 220 pips range and ended the week at 1.2405. For the seventh week, the pound has been moving the range between 1.2150 and 1.2640. Overall, however, the pound is in a declining trend, which is confirmed by the declining trend line between points A, B and C. At the same time, the support line between points D and E was broken and a new lower low was created below point E, see Figure 1.

Figure 1: The GBPUSD on a weekly chart

On the daily chart, see Figure 2, we can see that at a point G, the moving average of EMA 50 fell below the SMA 100, which still confirms the declining trend. The price has oscillated around the EMA 50 average for the last 3 weeks.

Last time we showed a hypothetical example of short speculation with a volume of 0.01 lot with an entry at a price of 1.25 when with a target price of 1.2170, the transaction would bring a profit of EUR 30. The stop loss would be above the last high, which is 1.2653. In monetary terms, the trader would risk EUR 14. As the price moved in the expected direction, the trader could shift the stop loss to break-even.  

Figure 2: The GBPUSD on a daily chart

The key levels of support and resistance are as follows:


Resistance 1 is at the level of 1.2620-1.2650.
Resistance 2 is in the zone 1.2700 - 1.2750. At the same time, this is near SMA 100 moving average that often reacts as resistance.
Resistance 3 is in the range of 1.2800 - 1.2850. Here, there is Fibo 78.6% of the FH movement. At the same time, there is the upper edge of the hidden gap on the candlestick that formed on March 12, 2020.

Support 1 is located in the range of 1.2150 - 1.2230.
Support 2 is in the range around the level of 1.1980 - 1.2000. Here, there is the bottom edge of the hidden gap on the candle dated March 26, 2020.
Support 3 is around 1.1400 - 1.1470.



COT Report


Additionally, we present the overall sentiment of the market, which according to the report COT (Commitment of Traders), which is presented every Friday, brings the following information: 

COT report
Instrument Data as at 8.5.2020 Data as at 1.5.2020 Data as at 24.4.2020 Data as at 17.4.2020 Data as at  10.4.2020 Sentiment
British pound -12 000 -6 700 -1 400 3200 3700 Strong bearish
USD index 16 400 16 100 15 600 15 400 15 000 Strong bullish

Last week, big speculators again reduced the overall position on the British pound. This is the ninth decline in a row, so bearish sentiment prevails on the pound. Speculators, on the other hand, strengthened their overall net position against the US dollar again for the seventh week in a row, which, despite poor macroeconomic data in the US, confirms that the dollar serves as a strong reserve currency in times of crisis.

What awaits us this week?

Concerning Brexit, another round of negotiations on a trade agreement should take place this week.

From a macroeconomic data point of view, Britain will report GDP data for 1Q 2020 on Wednesday, where a decline of -2.1% is expected on a year-on-year basis.  Data on the trade balance and manufacturing production will also be reported.

In addition, further developments in the spread of the coronavirus disease and the measures taken in this regard need to be monitored on an ongoing basis. 

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