Strategy
Sell GBP/USD at 1.2910. Stop at 1.3050 and profit target at 1.2320
Technical View
Since dropping to a low of 1.1332 at the height of the global coronavirus pandemic in March 2020, Sterling has recovered to 1.3175, which is at a 10-month high. Price has declined lower to 1.2710 today but this may not be the low. We are expecting price to move lower to 1.2320 on the back of an A-B-C correction. The target price is also the Fibonacci 127% projection point of the decline from 1.3481 to the low of 1.2762. Stochastic may have come down to the oversold zone but the move above the oversold extreme looks weak. Stochastic is likely to move back into the oversold extreme again as MACD is bearish and hinting of more price declines. 20EMA had capped price recently before the decline to 1.2710 today. 20EMA is still pointing lower and its slope is steep, which is a hint of a strong bearish trend ahead.
Fundamental View
British Prime Minister Boris Johnson British Prime Minister Boris Johnson is prepared to impose new restrictions to tackle a second wave of the coronavirus outbreak after UK chief Scientific Advisor Patrick Vallance warned that without urgent action, coronavirus inflection rate could lead up to 50,000 new cases a day by mid-October 2020. This second wave of inflection is likely to disrupt UK’s economy recovery three months after UK eased lockdown restrictions.
Global coronavirus cases in Europe have started to increase and some countries in Europe are looking at re-introducing lockdown restrictions again. As no vaccine has yet been found for this virus, fears and worries are likely to stay high which could benefit the US dollar status as a safe haven in this time of crisis.
Another factor that weighs down Sterling is ongoing Brexit worries. With talk between UK and the European Union over a trade deal yielding little progress, the worries are that UK has until October 15 to reach agreement over a trade deal or there will be a messy no trade deal Brexit. This could potentially jeopardize the whole Brexit treaty and create frictions in British-ruled Northern Ireland where special arrangements had been made to avoid a hard border with Ireland. Trade talks could also be derailed by a controversial bill introduced by the UK government that will violate the Brexit deal with EU, who has warned that UK Boris Johnson’s bill could collapse trade talks and propel the UK out of Europe with a messy Brexit.
Investors are starting to price in negative rate for the UK economy comes March 2021. This could have an adverse effect on the British pound. A negative rate is likely to drive demand out of Sterling and into the US dollar; whose central bank had maintain it is unlikely to use negative interest rate as a tool.