- GBP/USD suffers worst weekly loss despite UK election result as hard Brexit fears creep in.
- BoE expected to cuts rates, perhaps as soon as Jan 30th meeting.
GBP/USD is trading at 1.3008 at the time of writing, a touch higher and consolidating on the 200 four-hour moving average between and 1.2985 and 1.3014. Last week, cable was the underperformer into the close, extending the downside on Friday by an additional 60 pips following the Bank of England on-hold decision in the prior session. There was no surprise there although it is clear that bears will be looking for the Old Lady to cut rates if there are escalations of a hard Brexit risk and/or heightened tensions between China and the US with no trade deal. There were even calls for a rate cut to come as soon as next month.
Over the weekend, there have been a couple of developments with Beijing hitting out at Donald Trump over a defence spending bill and says it ‘interferes with china’s internal affairs. This has dented the related currencies and risk appetite as we head into the Xmas lull, a reminder to traders that there is no direct course in this trade war saga, and they had better-off take some profit off the table and wrap up for the holidays.
Back to the drawing board for the BoE
Meanwhile, it will soon be back to the drawing board for the BoE with its next meeting on Thursday 30 January 2020. Some analysts will be calling for a cut this soon in order to offset slower growth.
“Looking further ahead, there could be another cut during the second half of the year, although our base case right now is that the Bank of England will only cut once,” analysts at Danske Bank argued.
“Bank of England states that ‘If global growth fails to stabilise or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery’. The market has priced in 16bp cuts from Bank of England by year-end 2020 (and not much for January) so if we are right about a cut next month this could add fuel to the GBP depreciation we have seen since the election.”
While ‘getting Brexit done’ is the top priority for the Boris Johnson government, note that BoE governor Mark Carney’s term expires by the end of January 2020 and that no successor has been appointed yet. This will also be very important for what the Bank of England will do. For instance, will the government appoint a more dovish central bank governor, making cuts more likely, which could support the economy through the Brexit process?
GBP/USD levels
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Charts of the week: AUD/JPY & GBP/USD move to critical levels, extensions likely
Valeria Bednarik, the Chief Analyst at FXStreet, explained that the GBP/USD pair settled at its lowest since early December, and it’s at risk of falling further, mainly if it falls below 1.2970, now the immediate support:
“In the daily chart, technical indicators fell from extreme overbought readings to decelerate their decline around their midlines. An intraday rally met sellers around the 20 DMA, currently at 1.3070, providing resistance. In the 4-hour chart, the Momentum indicator hovers below its mid-line while the RSI indicator resumed its decline near oversold readings. Furthermore, the pair is battling with a directionless 200 SMA, while the 20 SMA crossed below the 100 SMA, with the shortest capping advances and both above the current level, skewing the risk to the downside.”
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