- GBP/USD is at a precarious position on the charts and fundamentally, doesn’t add up.
- Brexit, COVID-19, economy and risk all point to a bearish backdrop for cable.
GBP/USD is currently trading at the higher end of today’s range following a spike from 1.2472 to a high of 1.2643, holding a 1% gain on the day in the face of a significantly weaker greenback. At the time of writing, cable is trading at 1.2597 while the DXY is trading along 99 the figure and finally gaining some traction.
Markets are offloading the USD as economic recovery prospects are taking up the headlines in financial and commodity markets pertaining to nations, and some US states, seeking to kick start their economies again by relaxing social distancing as the COVID-19 curve peaks. DXY has dropped from 99.73 to a low of 98.81 today, although it wasn’t too long ago that it ha been testing the higher end of the 100 handle on 24h April.
As written in the latest gold news, Gold in the balance of COVID-19 waves of global resurgence, “despite the flattening of the curve and the recent calming effect in markets with stocks making a comeback (S&P 500 meets a 61.8% Fibo of stock market rout), the months ahead will probably still be quite volatile.” So, while the dollar is sinking, we are not out of the woods yet by any stretch of the imagination. DXY is testing a key support structure at this juncture, at the 50% mean reversion mark of the early March rally from below 95 the figure. Should this hold, GBP’s own intrinsic qualities will be scrutinized and potentially make way for the bears to sell back cable at a discount.
What we have seen is a recovery in the gilt market and this, as analysts at ANZ Bank explained, “has been instrumental in the GBP’s better performance over the past month.”
Maintaining confidence in the UK’s ability to finance public spending is critical for the GBP going forward.
However, with Brexit back to the fore and with potential trade war dust being kicked up by US President Donald Trump, the bulls will have a lot to contend with going forward.
The UK has until the end of June to decide whether to extend the transition period. We understand many in the cabinet would prefer not to. GBP is vulnerable to a rise in negative sentiment. How the Brexit timeline unfolds and the degree of confidence in the gilt market are key for GBP,
– the analysts at ANZ Bank said.
As far as trade wars, in Asia, markets got a glimpse of what to expect going forward. President Trump, in Reuters interview, has said that the trade deal with China has been “upset very badly” by the coronavirus and risk turns sour. The US dollar spiked, albeit to shortlived highs on the news. More on this here: US Pres Trump: US trade deal with China has been “upset very badly” by the coronavirus.
Overall, there is no construct bullish story out there for the pound. With sharply rising unemployment and a large twin deficit which is always going to make for a bearish case for sterling, coupled with plunging growth and the highest rats of COVID in Europe, higher cable is a hard sell right now. When you throw hard Brexit sentiment into the mix, then a fade on rallies at current levels or higher remains compelling.
We do think Brexit anxieties will resurface in the coming weeks. They could renew concerns about the UK’s future economic structure and reshine the spotlight on the UK’s huge financing requirements (about 20–25% of GDP this year). We, therefore, expect GBP weakness to re-emerge in the months ahead,
– analysts at ANZ Bank argued.
GBP/USD Fibos plotted with levels
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