GBP/USD Resilient but Brexit Issue Remains Delicate

Market Analysis /
25 Feb 2019

Last Week Market Wrap

  • GBP continued its rally from the prior week on the back of strong retail sales numbers. The rally was further extended with solid employment data on Tuesday albeit missing market expectations. Wage growth was forecasted to come in at 5% but markets were happy with a modestly lower growth at 3.4%, taking into consideration the labor market remained resilient despite the ongoing uncertainty in US-China trade and Brexit issues. Unemployment was unchanged at 4.0%.
  • GBP advances was knocked off on Wednesday after 3 members of the British conservative party resigned, reducing the government’s working majority in the House of commons to 8 and raising the difficulty of passing a deal in Parliament.
  • London and Brussels still deadlocked over the withdrawal agreement on Wednesday after UK Prime Minister Theresa May’s meeting with European Union’s executive arm, Mr Jean-Claude Juncker. There were no formal assurances or commitment from EU to discard the irish backstop completely. However, some progress was made in a sense that both sides will work on a “compromise” in the form of legal assusurances that the backstop will be temporary and invoked only as a last resort.
  • US-China trade negotations was injected with fresh dose of optimism after talks on Thursday yielded five MOUs (memodrandum of understanding). As of writing, leaders from both sides also expressed that they were close to a deal, agreeing to extend talks throughout the weekend in Washington.
  • USD remained resilient to further decline despite FOMC meeting minutes reiterating members’ unaminous stance on being “patient” with rate hikes.
  • GBP was initially down on Friday due to cabinet ministers calling for UK Prime Minister May to step down after the local elections in May. The sell down was reversed after two EU officails told Bloomberg that UK Prime Minister May is expected to ask for a 3 months technical delay on Brexit to get her house in order if her deal is backed by Parliament.

The Week Ahead

  • The Bank of England’s Governor speech on Monday and Tuesday will have some impact on GBP but is likely to be overshadowed by the motion in parliament on 27 February.
  • US Federal Reserve Chairman Powell to testify before congress on Wednesday. It will shape growth and monetary policy expectations, especially the likelihood of a rate hike.

Bottomline: Brussels and London wants to avoid a no-deal Brexit

The saga surrounding Brexit will soon come to an end on March 29, if there is no request from UK to extend it. This scenario is getting unlikely as the UK parliament struggles to agree on a deal over the irish backstop. If a deal is not put together by PM May by 27 February, she has promised to update Parliament on its progress and allow lawmakers to debate for alternative courses of action. It may include Parliament taking control of the exit process from the government which can have multiple consequences. Therefore, it may take some time before a better deal can be materialized to be put up for a meaningful vote in Parliament.

Regardless of what happens this week, the bottom line is that it is definitely not in the interests of both EU and UK alike for UK to crash out of the bloc without a deal. Although the EU refuses to commit on removing the irish backstop completely, it appears amicable in trying to reach a middle ground with UK. Therefore, we may see a compromise reached in the coming weeks which such a deal will eventually be able to push through the Parliament before a stipulated deadline.

However, extreme selling will occur if for whatever reason things go south quickly and UK crashes out. The GBP may decline by more than 5% within a short span of time due to market fears coming true. Hence, it is important for traders to thread this currency cautiously and manage their positions according to the unfolding saga. Wild swings can be expected to take out traders’ position with tight stop losses regardless of their intended direction.

Fundamentals are mixed while Brexit worries looms

From our last article on GBP, the fundamentals titled towards a bearish outlook and it was written before the release of the employment data. Though wage growth fell short of expectations last week by 0.1% in last week’s data release, the market still viewed it positively. This was because, wage growth remained resilient at 3.4% unchanged from previous period (its higest despite the ongoing US-China trade war and Brexit concerns. Moreover, unemployment also remained unchanged at 4.0%. In fact, both its unemployment and wage growth is currently at its strongest level since the mid 2009s.

Therefore, the outlook is now mixed and there is a possibility of upside in the pair given that USD may also slide further due to the recent US FOMC meeting minutes confirming its members’ dovishness.

However, traders should continue to be on the look out for any adverse change in the Brexit conditions and USD Fed stance next week as the political and economic situation in UK remains delicate. 

GBP/USD Technical Analysis

Last week, GBP/USD resume its climb after 3 weeks of pullback with a clear bullish engulf candle formed. It shows that the support region of 1.2770 is strong and is able to halt the selling pressures present in the weeks preceding it.

However, the volume remains flat and the price is currently sitting at the resistance region of 1.3080 to 1.329. To go up further it must be able to gather enough strength to break the hard resistance level of 1.31465 and 1.32838. An improvement in Brexit conditions and US Fed dovishness may provide support for this break through.

Conversely, if the mentioned resistance regions holds well, we may see price revisit the strong support region of 1.2770 and 1.2660.

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