IS GBP/USD Going to Turn Bullish Now As Brexit Heads for Another Extension?
Skerdian Meta • 3 min read
Theresa May finally left the position of Prime Minister and Boris Johnson (BoJo) took her place. Johnson was one of the main Brexit supporters three years ago, so it was obvious he would push for Brexit once he took power, deal or no deal. BoJo has made it pretty clear in the last few months and as a result, the sentiment surrounding the GBP deteriorated in the first few weeks after he became Prime Minister. But the Pound turned quite bullish this week and there are quite a few reasons for that.
Better Market Sentiment
GBP/USD broke below the big support level at 1.25 and last week it even broke the other major support area at 1.20. But, the sentiment improved early last week as China and the US softened their tones which turned the USD bearish as well. Since then, this pair has climbed around 500 pips. The GBP benefited from it as a risk currency, while the USD suffered. But the improvement in the market sentiment has’t been the main reason for this reversal.
There are quite a few reasons for this and one of the main reason have been the main Brexit developments in the UK which is increasing hopes for another Brexit extension and a probable Brexit deal. PM Johnson decided to prorogue the British Parliament and the first ruling of Scottish courts allowed it. But, the second ruling from the Scottish High Court rejected it. Now, Johnson will take this case to the Scottish Supreme Court. This makes things confusing, but at least is one step closer to getting another Brexit extensions, hence the bullish momentum in GBP pairs.
Besides that, the UK parliament voted to make it illegal to leve the EU without a deal. The bill was signed by the Queen of England, so it now is a law to not crash out of the EU. Boris Johnson is still keeping contacts with the EU, but it will be difficult to strike a deal until the end of October when the Brexit deadline is, especially since the UK Parliament is going to be dismissed soon. This leaves us with another extension as the only scenario.
The British economy has been weakening considerably this year, following the Eurozone and global economies. Manufacturing has been in contraction for several months, as has the construction sector which is deepening the contraction further. Services which is the main sector has been weakening, but it’s holding up just above stagnation. In Q2, the UK economy contracted and economists predicted a recession as we headed in Q2.
But recent data has shown some resilience in the UK economy, despite the international turmoil and Brexit headaches. The GDP report released on Monday, showed a 0.3% expansion that month, as did the manufacturing report, which was expected to show a 0.3% instead for July. Goods trade balance, index of services and the industrial production also beat expectations, with the latter two coming in positive. The NIESR GDP report showed a 0.1% expansion in August, while July was revised higher to 0.0% from -0.1% previously.
But the biggest surprise came the next day when the employment report was released. The unemployment rate ticked lower to 3.8% from 3.0% previously, jobless claims came below expectations and the previous number was revised more than 8k lower, while earnings posted some great numbers once again, growing by 4.0% 3m/y, against 3.7% expected. The previous number was revised higher as well to 3.8%. These economic figures now show that the UK might avoid a technical recession, which is the GDP contracting in two consecutive quarters.
The technical picture holds some importance as well for the GBP, despite the strong impact from fundamental reasons such as Brexit politics and the economic data. Looking at the weekly GBP/USD chart, we can see that the area below 1.20 was the low following the Brexit vote three years ago. The price reversed at the same area this week. This means that big players pushed the price below 1.20 for a short time to haunt some weak stops and then reversed their positions. Bastards do that often to small timers. It also means that most traders basically reversed to long after the support area held. Another aspect of the technical picture is the fact that long term GBP/USD sellers who went short on the way down, might be short covering their positions.
The previous support area held again this week
This would be a positive factor in the long term, but it is having its say in the GBP already. Will the UK economy reverse after this? Are EU and the UK going to reach an agreement? Is the GBP going to turn bullish now? There’s still no answers for these questions yet. We will have to follow politics and the economic data in the coming weeks. Also, we will see how GBP/USD reacts to 1.25 in the sessions ahead. If that level holds, then bears will still be in charge, if it breaks easily, then we might even see 1.30. But it will depend on the momentum and Brexit politics.