The Analysis of the GBP/USD Currency Pair

Summary:

  • Brexit continues to put pressure upon the pound;
  • business activity supported the British currency. The “Commitments of Traders” data point to a decrease of short positions;
  • the demand zone of 1.2570-1.2650 affects the balance of power in the GBP/USD currency pair.

News background

Over the past two months, the pound has significantly strengthened its position against the US dollar. One of the fundamental reasons for the GBP/USD currency pair growth is Secretary of State David Davis’s comments concerning the UK withdrawal from the European Union. In his recent report in Parliament, he stated that Great Britain can ensure access to the EU market if the country pays for it.

Jeroen Dijsselbloem, chairman of the Eurogroup, said that it can effectively solve the issue of the UK access to the EU market. At the same time, the head of the Eurogroup said that in the current political situation, the presence of the UK on the single EU market will be more complex and costly.

It should be noted that last year, the net British contribution to the EU economy has exceeded 8.5 billion pounds, what significantly strengthens the country’s position in this matter. The EU investment into the UK amounted to 4.5 billion pounds. At the same time, Britain has assigned more than 13 bln. pounds to support the EU economy.

Prospects of softer Brexit support demand for the pound. At the moment, the attention of the currency market participants is given to the UK Supreme Court meeting, which will consider the appeal claim of the country government against the High Court in London. It is expected that a decision will be made in mid-January.

brexit uk eu pound

It is to be recalled that the High Court in London has given Parliament more power than it is provided by “royal prerogative”. The main argument of the lawyers who represent the interests of the UK government is that with “royal prerogative” the government can independently assign the date of departure from the EU.

If the Supreme Court supports the decision of the High Court in London, then British Prime Minister Theresa May may have difficulty with the implementation of Article 50 of the Lisbon Treaty at the end of the first quarter of 2017. According to this article, the UK government may begin the process of departure from the EU by its own forces. If that happens, it could slow Brexit. The Article 50 provisions can be applied only in the second quarter of 2017.

The British government still have disputes on some Brexit issues. One of the conditions of access to the EU single market is the free movement of people. According to the Sky News channel data, UK Foreign Minister Boris Johnson said that he supports freedom of movement, but it is not the position of the entire government.

Fundamental analysis

Recent data on the UK business activity significantly increased demand for the pound. In November “index of business activity in the construction sector of the country” increased and amounted to 52.8 against the market expectations of 52.2. Business activity in the services sector had an optimistic dynamics. The index was 55.2, compared with the previous value at the level of 54.5. At the same time, the data on the manufacturing sector of the country was weak and fell by 1.5% compared with the previous period.

fundamental analysis

We recommend to pay attention to the news feed on the UK economy in December of this year:

  • change of the number of applications for unemployment benefits, on 14th December (11:30 GMT + 2: 00);
  • retail sales, on 15th December (11:30 GMT + 2: 00);
  • the Bank of England decision on the interest rate, on 15th December (14:00 GMT + 2: 00);
  • the data on the GDP of the country, on 22nd December;
  • the volume of retail sales, on 15th December (11:30 GMT + 2: 00).

These events can significantly affect the dynamics and volatility on the market.

The “Commitments of Traders” data show that large speculators closed short positions in the last two months. In early October, the major players opened 154 332 contracts for short side. A recent report has shown that the reduction of short positions amounted to more than 16% – up to 128 941 contracts. Net short positions showed the minimum values in the last two months.

Technical analysis

Key levels:

Support levels: 1.2500, 1.2335, 1.2165
Resistance levels: 1.2770

In the middle of October, the GBP/USD currency pair kept the strongest support level of 1.2165, which caused the development of “bullish” moods. During this period, the growth of the British currency quotations has exceeded 600 points. Since the beginning of this month, there is a correction in the GBP/USD currency pair. Now the technical pattern of the trading instrument is ambiguous: the price has fixed between 50 MA and 200 MA, which are very strong dynamic support and resistance levels; the MACD histogram has moved into the negative zone and continued to decline. We recommend to search for entry points from key levels.

gbp-usd-analysis

The last trading sessions the GBP/USD currency pair is testing the 1.2570-1.2650 demand zone. If the price keeps this zone and additional confirmation occurs at the smaller timeframes (technical analysis figures, Price Action patterns), the upward trend continuation is possible. The potential movement is to 1.2800-1.2900.

An alternative would be the development of bearish moods on GBP/USD. If the price fixes below 1.2500, we may see fairly aggressive sellings to the nearest support levels: 1.2335 and 1.2165.