Analysis | September 16, 2020

KTM FX Weekly: Closed above two important resistance levels

The pound was up 0.45% last night against the EUR; it was the first uptick since a week. The volatility raises since last week on the latest no-deal Brexit concerns.

UK left the EU at midnight on 31 January 2020, so the UK is now in the transition period of 11-months with the EU. During this transition period, the UK is bound to the European Commission rules.

Looking at the Brexit timeline, the transition period ends on 31 December 2020. The new relationship between EU and UK begins on 1 January 2021, provided an agreement has been reached that has been approved by EU member states, the European Parliament, and the UK parliament, according to the Government.NL

  • At UBS, Paul Donovan says, “The interminably tedious EU-UK divorce is still with us (of course). There are reports that the UK-Japan treaty sets stricter rules for state aid than the EU has been considering. Investors should ignore everything until the last possible minute, as nothing will be decided until the last possible minute.”
  • PM Johnson is aiming to rewrite part of the Brexit divorce deal. In his first parliamentary debate on his Internal Market Bill, he argued that the legislation is “essential” for guaranteeing the UK’s economic and political integrity, NAB said in a note this morning.

In the recovery front, the latest ONS estimates suggest the UK economy contracted by 7.6 percent in the three months to July and the economy grew by 6.6 percent in July itself. Despite this recovery, the economy has still only recovered just over half of the lost output caused by the national lockdown, as per the official release.

The latest NIESR Monthly tracker report suggests, All the main sectors of the economy remain below pre-crisis levels. However, improvements have been seen in manufacturing and agriculture, but services and production remain sluggish. Considering the latest ONS estimates, we forecast GDP to grow by about 7 percent in the three months to August and expect to see a growth of around 15 percent in the third quarter of 2020.

Data review: 

  • According to the ONS, Gross domestic product (GDP) grew by 6.6% in July 2020, the third consecutive monthly increase.
  • Industrial Production grew by 5.2% in July 2020, with manufacturing growing by 6.3%.

 Data preview:

Turning to the week ahead, there is plenty of action on the UK macro front. We will see Claimant Count Change, Unemployment rate, inflation, retail sales, and the Bank of England policy meeting. We expect the BoE hold the rates.

  • James Smith and Antoine Bouvet at ING cited, “Two things to expect this week.”

Firstly, will policymakers acknowledge that the downside risks to their August forecasts are growing? Certainly, some MPC members have been sounding more cautious in recent weeks.

And if so, secondly, will the Bank offer any clues as to how it might increase the level of stimulus in November? Despite the recent hype surrounding negative rates, Governor Andrew Bailey has indicated that he believes quantitive easing (QE) is a more useful marginal policy tool, and this is likely to be at the center of the stimulus package we expect in the autumn.

 TECHNICAL OVERVIEW

The pound fell nearly 4% in response to the no-deal Brexit news. 

The EURGBP has reaffirmed support since last week; well, support at 0.8865 levels. Following this, the cross rallied strongly and closed above two important resistance levels. The cross, which has been forming higher lows in the last three months, is exhibiting a bullish bias that is likely to advance from current levels.

On the upside, the trend is supportive, but the price needs to take out the recent swing high at 0.9300-0.9325 above this, we could see a further upward journey towards 0.9370, its wave C. Support exists at .09170 and 0.9070. Buy the dip favors the risk-reward ratio.

 It is important to always keep in mind the risks involved in trading with leveraged instruments.

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