- GBP/USD remains in better bid territories following Tory victory.
- UK politics is peaceful, for now, but dangers ahead can cap GBP.
- Bulls will hunt down the 1.40 handle on smooth Brexit transition and trade negotiations.
GBP/USD is currently trading a touch higher on the day but remains elevated on the path to Brexit and some temporary relief due to a meanwhile sate of political stability in the UK. At the time of writing, GBP/USD is slightly higher on the day +0.9%, having travelled from a low of 1.3321 to a high of 1.3422.
Indeed, the pound reacted as the markets fully anticipated to the Conservative’s election victory. Markets cheered the break of the deadlock in Parliament over Brexit which will now enable the UK to leave the EU on 31 January.GBP/USD rallied 2.5% on the election result and completed a 61.8% Fibonacci retracement of the 2018 downtrend through the 1.3450s on the euphoria.
The political declaration is now key for GBP, but watch SNP
Providing all goes according to plan and the UK ends up leaving the EU on 31 January, cable can continue higher and perhaps even as high as he 1.40s so long as progressive and pragmatic trade talks take place. However, there must be a clarification that hard-Brexit is ruled out and that Boris Johnson ensures that a tariff-free quota-free trade deal along the lines of the political declaration, PD, which set out the framework for the future relationship between the European Union and the United Kingdom as agreed at negotiators’ level.
The PD is containing plenty of aspirations involving shared interests, close partnerships and ambitious co-operation. Both sides want that relationship to be as close and co-operative as possible but that aspiration will be tested in the years ahead, And no-one can say for certain how long it will all take to negotiate – that is where the bulk of the risks now lie for the pound with respect to Brexit.
While the pound can relish in the market euphoria, for now, there are plenty of hurdles around the corner, taking into count the SNP’s dominance in Scotland and the DUP’s fall from grace in Belfast. N.Ireland. The political turmoil in the UK is far from over and will no doubt begin to rear its ugly head in little time to come. Sturgeon, whose SNP party has gained more than a dozen seats will certainly press the case for a second independence referendum in Scotland. Elsewhere, traders will be relieved that economic data will once again be a core driver for sterling markets.
UK data and BoE
Today’s PMIs (both the manufacturing and services PMIs have fallen further below the break-even 50 level in the latest flash readings) were likely somewhat ignored for they were before the UK elections, so it was probably too soon to be paying too much attention to them. However, next month’s will be the first set of data following the UK election and will go towards the Bank of England’s interest rate decision making processes for 2020. The data today, however, will at least confirm that there will not be any meaningful hawkish tilt from policymakers this week. We will also have the UK’s jobs data, a speech from Carney, Consumer Price Index all ahead of the Bank of England on Thursday.
GBP/USD levels
Chart of the week: GBP/USD bulls target a grind higher to 1.3850s
- GBP/USD bulls in control, seeking a close around December 2017 high is at 1.3550.
- The next target comes in the 1.38s where there is a confluence of Fibonacci retracement targets and the February 2016 swing lows.
- While below 1.3351, as being the February and March highs, bears can focus on a break below 1.3305, (S1), 1.3270 late March highs and the 1.3217 January peak.
- The 200-day moving average is a critical downside target at 1.2680/00 (just below the golden cross).
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