GBP looks set for more gains on strong risk appetites
Rising risk appetites and with Brexit gloom dissipating a bit, GBP could reach 1.4500-1.5000 against USD providing that sentiment remains positive.
With the EU beginning to appreciate that it also has something to lose from a ‘no deal’ scenario with the UK, hopes are buoyant that a transition deal will be struck between the two following Brexit in March 2019.
This addresses two key issues. One, it means there will be no so called cliff edge right after March 2019 when trading barriers would likely be erected between the two jurisdictions. Secondly, it buys more time to negotiate a comprehensive trade deal meaning less disruption to the UK economy.
Meanwhile, the UK economy has been under-performing though nowhere near as badly as the UK Treasury and others forecast it would post the June 2106 referendum. The current malaise looks like a case of consumers having maxed-out with the inevitable slow down now happening.
December retail sales fell 1.5% from November partly because Christmas spending was brought forward by the likes of Black Friday promotions and other heavy discounting. For 2017 retail sales grew 1.9% less than the 4.7% in 2016 and this year could be quite pedestrian on the consumer front.
However, GBP could well continue to strengthen this year, including against the EUR. This will boost UK spending power and this could lift the economy.
Other factors, which could help include the buoyant global economy, the start of infrastructure spending programmes and crucially UK productivity, which has been lacklustre for years. It may just be turning following a 0.9% jump in output per hour in Q3, 2017.
But GBP bullishness comes with caveats. There still lies plenty of drama ahead in the Brexit talks, which could go either way. It is also important to note that GBP strength also reflects increasing USD weakness.
TECHNICAL ANALYSIS: GBP/USD - large correction looms
On the technicals, GBP/USD remains bullish with more gains likely over the next few months. Also, positive is that there is still a massive gap left on the chart due to the June 2016 referendum result to leave the EU, which saw GBP plunge. This has nearly been filled and GBP/USD would need to reach 1.4013 to close it. Markets generally aim to fill chart gaps.
However, GBP/USD is also likely to soon see a big reversal - not necessarily a trend killing one and probably won’t get far past 1.4013. Consider that the pair have strayed into overbought territory on the daily RSI, they are punching through the upper Bollinger band and have drifted a long way from the 200-day moving average (turquoise blue).
The last point is important because markets tend to revert to mean and right now GBP has gone quite far off it. The last time these three indicators were aligned in a similar way was in September 2017 and what followed was quite a big pull-back from around 1.3500 to just above 1.3000 and this lasted a couple of weeks. So GBP bulls should be extra vigilant.
Resistance is pegged around 1.4000, 1.4013-5, 1.4094-6 and 1.4115 with support seen at 1.3792, 1.3765 and 1.3607-11.
By Justin Pugsley, Markets Analyst, MahiFX