Foreign exchange trading is beginning to enjoy the holidays: currency pairs are taking a break and not going anywhere fast. For GBP/USD, this is seen in stable range trading: 1.33 is a double bottom and 1.3450 serves as resistance.
Yet looking closer at the chart, we can see a nice series of lower highs: 1.3550 in late November, 1.3530 in early December, 1.3530 around December 8th, 1.3460 around December 14th, and 1.3420 on December 18th. Lower highs signal a downtrend even if 1.33 holds firm: it has been a double bottom: cable hit that line in both December 12th and December 18th.
But the technical levels are not alone: the charts are compounded with recent fundamental reasons that imply a break of that double bottom:
- Dovish BOE decision: The Bank of England left the interest rate unchanged at 0.50% and with a unanimous vote as widely expected. They did not want to rock the boat after their dovish hike in November. Nevertheless, the team led by Carney did note that indicators for the fourth quarter haven’t been that great: softer than expected was their wording. The recent jobs report, which showed a rise in jobless claims, confirms this.
- Harder Brexit: The EU agreed to move to the second part of the negotiations but this is the hard part. And as Britain wants a hard Brexit, the future looks gloomier. The City of London wanted an exemption from the hard Brexit, allowing them access to the single market. This was quickly rebuffed by the top EU negotiator Michel Barnier.
- Political instability: The cracks in May’s fragile government are revealing themselves. This time, they are coming from the soft-Brexiteers: they rebelled against the party line, voting with the opposition on a final say on Brexit, thus defeating the government. This is not the end of the story: the next clash between Conservatives from the soft and hard camps could have bigger ripple effects for the pound.
Sure, not all the data is bad and we could also get some positive surprises. But all in all, Britain is going in the wrong direction in terms of Brexit and the economy is not reaping the fruits of the synchronized global growth that the euro-zone, the US, Japan, and China enjoy.
What do you think? Is it time to go short on the pound?
GBP: Fading Extreme Brexit Optimism; What’s The Trade? – Barclays
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