What’s Happening?

This has the potential to be a big week for trading in Cable from both the technical and fundamental sides. GBPUSD is in the process of retesting support near $1.2000 which could end in a big double bottom and the start of a recovery or a big breakdown and the start of a new downleg. UK PM Theresa May’s speech on Brexit this week along with comments from incoming US President-elect Donald Trump and several others plus a number of key UK economic announcements this week could attract a lot of attention to the UK market and UK forex pairs.   

Technicals:

There’s a big technical test underway in GBP and USD to start the week. The pair has been under pressure since early December but higher lows in the RSI have not been confirming this, instead suggesting that downward momentum has been fading and peak pessimism may have already passed. 

Currently GBPUSD is retesting the $1.2000 round number with support in place near $1.1970. So far that key level has been holding and a double bottom forming. The pair dipped under $1.2000, held $1.1970 and has bounced back toward $1.2080, a potential bear trap shakeout bottom. Initial potential rebound tests appear near $1.2125 then $1.2285 and the 50-day average near $1.2400.

A failure of support to hold, however, could be devastating technically for the pair as a breakdown below $1.1970 would signal the start of a new downleg and confirm a bigger bearish trend with next measured support possible near $1.1610 then $1.1540 and the $1.1500 round number. 


Fundamentals

Despite heaps of evidence to the contrary that has emerged since UK voters’ decision last June to leave the EU, some on the street still seem to see a hard Brexit as a negative for the UK, while others are starting to see the positive which could set the stage for a titanic battle around the $1.2000 level. 

This Tuesday, UK PM Theresa is expected to give a major speech on Brexit, outlining her negotiation plan, which could trigger a lot of trading activity in the pound. Already, reports she may seek a hard Brexit sent GBP tumbling although subsequent trading suggests that ended up shaking out weak hands with bargain hunters stepping in to pick up the pieces seeing value.  

This week also sees Donald Trump’s inauguration and with the big day in the US approaching he has jumped into the debate on the side of Brexit. Over the weekend, he indicated he thinks Brexit will be a big success, that the US would like to reach a trade deal with the UK quickly, that other countries are likely to follow the UK out the door and that he sees NATO as outdated. 

Following the June Brexit vote, the pound sold off dramatically, but instead of collapsing as the Chorus of Brexit Doom had warned, the decision ignited the UK economy. In recent weeks, the Bank of England and the IMF have started to come around to the idea that they were wrong and that Brexit risks to the UK are not as bad as had been previously predicted. A dynamic post-Brexit UK, freed of the EU regulatory shackles, moribund economy and structural problems could become a formidable competitor to the EU, so as time goes on, EU faces more potential downside risk than the UK. 

Changing risk profiles between the UK and the EU could have a significant impact on forex trading both now and beyond. This week, a number of UK economic numbers are due including inflation Tuesday, employment Wednesday and retail sales on Friday could also spark trading swings in GBP pairs this week.  

 

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