- GBP/USD bears, pessimistic on Brexit hopes and UK economy, seek test and hold of 1.3300/20 resistance structure.
- Bulls seek a break above 1.3320, banking on a weaker USD environment.
GBP/USD is currently trading at 1.3266 between a low of 1.3267 and 1.3359 as the price pulls back to support structure and potentially gears up for the next bullish towards the psychological 1.35 handle.
The US dollar has found a bid this week on the back of strong manufacturing data with surging PMI and factory orders.
However, there are structural concerns over the greenback’s dominance now that the Federal Reserve has confirmed the bull’s worst nightmares.
Last week, the Fed’s Chairman Powell rubber-stamped the lower for longer stance which had already been well telegraphed in prior communications, although the official seal has shaken the greenback to its core.
A number of bearish factors are weakening the dollar’s reserve currency status and the monetary expansion in the United States is here to stay for a long while longer.
The Fed’s move to average inflation targeting and negative real yields will drive the dollar lower.
The Fed has its peddle to the metal in terms of the reflationary accelerator, so a weaker dollar is going to be part of the preferred monetary policy mix at this early stage in the recovery cycle.
So long as there is a period of calm in European politics, then the DXY, the FX spaces preferred measure of the dollar vs a basket of currencies, heavily weighted to the euro, will continue to be pressured.
DXY test resistance
The DXY currently trades at 92.84 after a battle back from the recent post-Powell speech 91.74 lows.
So far, the correction is quite dim when looking on the weekly chart and a failure at resistance will open the risk of a downside extension:
That’s a saving grace for the pound for its vulnerabilities is now likely masked by the US dollar’s muddy waters.
Tomorrow’s Nonfarm Payrolls will now be the main focus for the remainder of the week for USD markets.
GBP’s winter of discontent
Looking forward, there are plenty of downside risks to the pound on the domestic front.
Firstly, the pound revealed its fragility earlier this week when dovish remarks by policymakers in front of the House of Commons Treasury Committee, which signalled fears of risks due to the COVID-19 crisis shook its foundations.
A full five members of the 9-strong MPC spoke, with Key speakers including governor Bailey, Deputy Governor Ramsden, and External MPC member Vlieghe.
All three emphasised the degree and speed to which the BoE could expand its easing policies further.
Cautious about the outlook, despite a healthy rebound seen so far in consumer spending. Deputy Governor Broadbent’s speech focused on the challenges of inflating public debt away.
BoE’s Michael Saunders and an external member of the MPC will also speak on Friday. Saunders has voted in the past for further quantitative easing.
His view has been one that echoes the cautionary opinion that it is better to do too much too soon that too little too late.
Negative rates, as one solution, remain a thorn in the side of the pound.
Then, there is Brexit, and things are not looking too promising which is making for a likely winter of discontent in UK politics and for the pound.
Talks for a new trade agreement between London and the European Union (EU) have recently stalled with a number of disagreements.
The latest media reports suggest that the UK government reportedly sees no prospect for extending the transitional period for the negotiations and time is running out.
The transition or the implementation period ends on 31 December 2020.
There is more than a 30% chance for a no-trade deal Brexit, according to a recent report by JPMorgan, Reuters reported.
“The chance of no-deal is about a third, but with brinkmanship part of the process, it may appear higher than that before the agreement is reached,” according to JPMorgan.
“It would be a surprise to us if enough progress were made to bring agreeing a Treaty by end October into view.”
“The absence of that progress will generate pressure for interventions from UK and EU leaders; however, at this stage, we see little that suggests any major softening in the EU’s position or unity around it.”
Nevertheless, the UK’s Prime Minister, while confident that there will be no extension to the period, remains optimistic about reaching an agreement soon.
As can be seen, cable has taken a knock recently as the dollar picks its self up to test resistance.
There are two scenarios at this juncture:
Firstly, the pound has stabilised at the support of a daily impulse within the bullish trend:
The price has corrected to a 61.8% Fibonacci retracement and meets a critical structure. Bulls will be looking for signals of a bullish environment on lower time frames for a long opportunity.
On the other hand, if 1.3320 holds as a resistance, there will be the case for a bearish bias and break subsequent retest of the current support structure: