Currency Pair of the Week: GBP/USD

This week brings potential for more volatility in GBP/USD

Brexit 5

The last few months have been hectic for this pair due to Brexit, and we have dutifully been writing about potential price action in both GBP and EUR pairs.  If that’s not enough, this week brings potential for more volatility as both the Bank of England (BOE) and the US Federal Open Market (FOMC) meet this week, coronavirus cases continue to rise, and the UK Claimant Count Change for November will be released!

The primary and obvious event to watch the headlines for this week is whether there will be a Brexit trade deal.  After passing the new Sunday night “deadline”, UK PM Boris Johnson said that the two sides are still far apart, however he has agreed to “go the extra mile” to get a deal.  By now, traders should realize that deadlines don’t matter anymore and there is the possibility of these negotiations leading right up to December 31st. As of this writing, EU lead negotiator Michael Barnier told EU ambassadors that a deal could come within days if the two sides could reach an agreement regarding fishing rights. EC President Ursula von der Leyen also said they are dedicated to reaching a trade deal and that they want a level playing field (preventing unfair competition).    The other main issue outstanding is governance over the deal.

Both the FOMC and the BOE meet this week to discuss stimulus and interest rate policy.  The Fed will try and reassure traders that they will do all they can to support the economy.  At the November meeting, the committee indicated that they may be looking to shift their bond buying mix to include longer dated bonds, which would help to keep long term interest rates low. Therefore, they may expand the bond-buying program as well.  Staff members will release their revised guidance for 2021.  Recall that officials are willing to keep interest rates “lower for longer” while they let inflation run hot.  There have been numerous calls by the Fed for additional government support, however Congress has yet to pass an additional stimulus bill. 

If the BOE does anything on Thursday, it will be a surprise to the markets.  BOE Governor Baily has already indicated that their next move will be dependent on the outcome of a Brexit deal.  The Committee left rates unchanged at 0.10% in November, however they increased the size of the bond-buying program by 150 billion Pounds. 

Coronavirus and vaccine headlines in both the US and UK could influence GBP/USD this week.  London’s mayor, Sadiq Khan, recently announced that they are deeply considering moving the city to tier 3, as nearly 24,000 coronavirus cases have been reported over the last week.  Almost every day, parts of the US are reporting record numbers of new daily cases, hospitalizations, and deaths.  Many states are either under lockdown or severe restrictions.  The latest severe restrictions begin today, as New York City halts indoor dining.  However, on Friday evening, the US FDA approved the Pfizer/BioNTech vaccine for emergency authorization, which is already being shipped out.  The UK approved the vaccine last week and has already begun distribution.

In addition to central bank meeting this week, the UK will release the Claimant Count Change for November.  Expectations are for an additional 30,000 workers to be added to benefits vs -29,800 in October.  Recall that the UK was on lockdown for most of November, so its no surprise that expectations are for more people to have applied for benefits. 

The technical picture hasn’t changed but leaves plenty of room for volatility.  After the evening star formation and the false breakout above both channel and horizontal resistance, GBP/USD moved lower.  On Friday, the pair tested the bottom trendline of the channel as well as the 50% retracement level from  the lows on September 23rd to the highs on December 4th, near 1.3110.  Today, the pair gapped higher on the reopen from 1.3217 to 1.3355 and continues to move higher towards the prior resistance levels, including the December 4th highs near 1.3541.  Longer term horizontal resistance is near 1.3700.  Today’s lows and horizontal support is near 1.3290 and then the channel trendline near 1.3135.

Source: Tradingview, City Index

On a weekly timeframe, GBP/USD is currently trying to breakout above resistance at the downward sloping trendline from June 2016.  In addition, it is just below the 61.8% Fibonacci retracement level from the highs of June 2016 to the lows of March 2020, near 1.3630.   Additional long-term horizontal resistance is above near 1.4376 and 1.5000.  Horizontal support below is near 1.2675, 1.2075, and 1.1410.

Source: Tradingview, City Index

The major theme for this week in the UK is Brexit, however, don’t forget about central bank meetings, the ongoing coronavirus and vaccines headlines, and the UK Claimant Count Change this week. These topics can all create volatility in GBP/USD!

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