GBP/USD bulls are supported by the USD weakness
GBPUSD is strengthening being supported by several factors. They are correction of the US stock indexes, the increase in the chance of the federal funds rate cut by 25 basis points at the FOMC April meeting to 79%, and the dollar weakening. The GBP positions look extremely vulnerable in February; however, when the major competitor looks weaker, the pound bulls may try to go ahead.
The sterling seems to change its outlook for the better amid the UK stronger domestic data, expectations for the monetary stimulus from new Britain’s finance minister Rishi Sunak, and the undervalued British assets. It is evident from the pound’s strengthening in the derivatives market. Unlike most Forex liquid currencies, the speculative net longs for the pound and the US dollar are still increasing.
Dynamics of speculative positions for different currencies
The reports on the inflation, retail sales, and PMIs in the UK are stronger than Bloomberg experts expected, which increased the economic surprise index. The UK’s indicator is the second highest after the USA. Nonetheless, if the dollar supports the high approval rating of Donald Trump, the political issues in the UK press the pound down.
Economic surprise indexes
Source: Nordea Markets
New Brexit talks are to start in early March, and on the 11th of March, Rishi Sunak will present the details of the fiscal stimulus that may provide not so positive effect as the sterling bulls expect. The UK finance minister can well unpleasantly surprise the GBP bulls making it clear that higher expenditures will be associated with higher taxes.
Although the majority of the experts surveyed by Reuters believe that the Brexit deal will be signed before the end of the transition period (December 31), there are important differences between the sides. The EU insists that there can’t be a trade deal unless the UK legally accepts the playing field provisions acting against competitive advantages caused in case the EU rules are broken. Boris Johnson insists the UK should follow its rules in the areas of the State assistance, labor legislation, and environment. Otherwise, it will hinder the political and economic independence.
Boris Johnson has said he wants Britain to have a Canada-style free trade agreement with the EU. The EU may agree to sign this kind of agreement concerning the trade in goods amid the £94-billion surplus in trade with the UK. The situation with the services trade is more difficult. The EU trade deficit there is of £28 billion, and, if Johnson’s demands are met, the opponent’s positions will be stronger.
I believe that a shaky political environment and lack of economic news, as there hardly any important events scheduled for the UK in the economic calendar, press the GBPUSD down. The bulls can be supported only if the US stock indexes continue falling. If so, the pair should be consolidating in the range of 1.28-1.32.
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Price chart of GBPUSD in real time mode
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