GBP sails through a week of bad news – can its mojo last?
Traders can be forgiven for believing that GBP is the most toxic currency among all the majors with the UK’s future shrouded in uncertainty as it prepares to exit the EU and may itself break-up. Yet GBP has managed to hold above GBP/USD 1.2000, but can this key support level hold for much longer?
There are a few things going in GBP’s favour. USD seems to have run out of puff despite last week’s rate rise, which was promptly mitigated by dovish noises from the US Federal Reserve. The UK economy is doing relatively well defying the doom and gloom brigade. The icing on the cake of course, is that the Bank of England might be turning hawkish raising the chances of rate hike. Possibly the BoE doesn’t want GBP to fall further for fear of stoking inflation.
Beyond that, the uncertainties quickly pile up. The big one is the UK’s exit process from the EU, which is well known to the forex markets. However, the Scottish National Party has demanded another referendum on Scottish independence raising the very real prospect that the UK itself could be gone within 5-10 years. And this time the SNP seems to have a real chance of winning. This should be negative for GBP and will certainly complicate the exit negotiations if the SNP gets its way to hold the referendum within the next two years.
The big test for GBP is the triggering of article 50 of the Lisbon Treaty to leave the EU, which starts the two-year exit process. It was widely expected to take place last week, but may have been delayed due to the SNP’s referendum demand, which seems to have surprised UK Prime Minister Teresa May, despite Scottish nationalists daily threatening a vote since the Summer. It now looks likely that article 50 will happen at the end of this month.
At which point the real political fireworks start with the UK and EU drawing out their red lines. On top of the political vitriol on both sides there are also likely to be plenty of stories about UK industries, such as finance and automotive, being weakened and picked-off by EU countries keen to attract them to their shores.
Forex markets may have partly priced that in, what they probably haven’t priced in though, is that the UK may leave the EU with no trade deal and will fall back on WTO rules. Though it won’t end UK-EU trade it could certainly act as a drag on it. Whether that happens or not is impossible to tell at this juncture.
Nonetheless, this column remains confident that the UK’s flexible economy will adapt to life outside the EU with many faster growing economies to trade with and besides there are many trends, which will have a far bigger influence. These include ageing populations, the shift towards services, the rise of robotics, artificial intelligence and automation, the increasing importance of intellectual property for wealth creation and so on. And the UK is well positioned to benefit from some of these trends.
But the 2-5 years after exit could be tough for the UK and that’s ultimately what the forex markets will focus on. In the meantime, the main preoccupation will be over the kind of trade deal the UK gets with EU, if at all, and whether cooler heads prevail over wishes to punish the UK. It’s therefore hard to believe that GBP/USD 1.2000 won’t get tested over the next few months.
TECHNICAL ANALYSIS: GBPUSD shrugs off bad news
The political news in the UK was bad last week, but GBP/USD managed to shrug it off. From a technical perspective, that’s normally a sign of strength.
This week’s domestic news is likely to be dominated by a political row over a Scottish referendum vote and the timing of the UK triggering the exit process from the EU. If GBP/USD can withstand that, then that is surely very bullish, even holding above support above 1.2000 would be positive for cable.
GBP/USD spent much of February and part of March in retreat, but found support around 1.2150 and bounced off that base to reach 1.2400. Meanwhile, the slow stochs have a strong buy signal, the daily RSI is still neutral and the pair have not reached the upper Bollinger band. In other words, there is still scope for some upside, possibly to 1.2500-1.2600 in the short-term. Beyond that any further advances will likely become harder.
Resistance is placed around 1.2441, 1.2488, 1.2556 and 1.2662 with support seen at 1.2291, 1.2218, 1.2150 and 1.2109.
By Justin Pugsley, Markets Analyst, MahiFX