Strategy
Sell GBP/USD at 1.2220. Stop at 1.2670 and profit target at 1.1475.
Technical View
On the 30th March 2020, price started a decline that brought it to a low of 1.1332. From this low a rally brought price to a high of 1.2646 on 14 April 2020. On a second attempt, price reached a high of 1.2642 on 30 April 2020. The attempt to break above the previous price high was not successful and a decline followed that brought price below the cloud. Price has been unable to break above the cloud recently, capped by the upper line of the cloud. Conversion line and Base line had a bearish crossover recently, hinting of a bearish trend ahead. Lagging Span confirms the bearish trend. Lagging Span is below price of 26 periods ago and also is currently below the cloud. If price is capped below the Base line at 1.2360, it is likely to be heading lower to test the previous low of 1.1475 or the low point at 1.1332.
MACD is bearish with both its lines below the zero line, although both these two lines are not too far away from the zero line. However, this could be a sign of the beginning of a trend. Both of MACD’s lines could be experiencing a bearish crossover and this would confirm the bearish price of price.
Fundamental View
Last week, UK bonds were sold at negative rates at an auction. UK bond market has continued to price and indicate that the Bank of England could cut rate to below zero in future. With monetary policy coming up in mid-June and with Bank of England’s policy makers not ruling out negative rates, UK bond yields continue to stay negative. Even BoE’s governor Bailey stated that negative rates were being considered along with other measures. Market may be pricing in a possible negative rate in the mid-June monetary meeting.
Another factor that weighs down the Sterling is ongoing Brexit worries. With talk between UK and the European Union over a trade deal yielding little progress after a third round of talk, the worries are that UK has until June 30 to extend negotiation over a trade deal. However UK’s Prime Minister Boris Johnson has not expressed any willingness to seek an extension. Without an extension, there may not be enough time to secure a trade deal beyond the transition period which will end on 30 December 2021. UK exiting the European Union without a trade deal would be bad for the British economy and the pound.
Economic data in the UK is poor. Retail Sales are bad, public sector finances are worse than expected. Things are likely to get worse as a result of the ongoing Coronavirus impact on the UK economy. Compared to the U.S., the economic situation in UK could be worse than that of the U.S.
Without UK bond going into negative rates, the US dollar already has an interest rate differential advantage over the British pound. It is likely to make long GBP/USD position costly as a result of the swap rate involved.