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– GBP opens on front foot as dust settles on election.
– Charts point to further gains over EUR, USD up ahead.
– But others say further upside to be limited in short-term.
– Market eyes withdrawal agreement vote in parliament.
– Also looks for clues on BoE response to fiscal splurge.
The Pound entered the new week on its front foot Monday with charts pointing to further gains over the Euro and Dollar ahead, while some fundamental analysts are cautioning that upside could be limited in the short-term.
Sterling was on its front foot Monday and is now the best performing major currency of 2019 after Prime Minister Boris Johnson secured a landslide election victory that’s created scope for the country and currency to move onto the next chapter in the Brexit saga.
“GBP/USD trades back around the March peak at 1.3382, having briefly reached 1.3515 post the UK election result last week. Above the high at 1.3515 sits the December 2017 high at 1.3550 and still further up the September 2017 peak at 1.3658 as well as the February 2018 low at 1.3712, all of which are now in focus,” says Axel Rudolph, a technical analyst at Commerzbank.
Rudolph says the Pound will find support at 1.3270 and 1.3217 on dips lower against the Dollar although he’s looking for it to return toward last week’s highs over the coming days.
Above: Pound-to-Dollar rate shown at daily intervals.
“EUR/GBP dropped like a stone from around the .8450 region to its current December low at .8239 post the preliminary UK election result which gave the Conservative party a comfortable majority. Today and for several more days the currency pair is to range trade above this level but below the December 9 th low at .8393. Over the coming weeks the June and October 2012 highs as well as the April 2016 high and the January and February 2014 lows at .8167/18 represent our downside target area,” Rudolph says of the EUR/GBP rate, the inverse of the Pound-to-Euro rate.
The Pound-to-Euro rate should range-trade between 1.1914 and 1.2137 this week, according to Rudolph, who also tips the exchange rate to hit 1.2244 over the coming weeks. That would put the Pound at its highest level against the Euro since the night of the Brexit referendum in June 2016.
Rudolph, who draws his insights from studies of trends and momentum on the charts, has a bullish outlook for the Pound over the coming weeks but fundamental analysts have a different view. For those taking their cues from macroeconomic fundamentals and goings on in Westminster, upside for the Pound is likely to remain limited in the weeks ahead.
Above: Pound-to-Euro rate shown at weekly intervals.
“The UK general election has provided a clearer path towards a resolution to Brexit and looser fiscal policy, which should boost economic activity and push up sterling, UK equities, and Gilt yields. That said, as long as there remains the possibility of something like a “no deal”, those gains ought to be limited,” says Hubert De Barochez at Capital Economics.
An 80 seat majority means Johnshon should have little trouble passing his withdrawal agreement through parliament when it next goes before MPs, although a date for the vote is yet to be scheduled.
A Downing Street spokesperson said Monday the Withdrawal Agreement Bill, which is the vehicle through which the agreement itself will be ratified, will be put before parliament again as soon as Friday.
Ratifying the agreement makes a ‘no deal’ Brexit unlikely in the eyes of the market but it doesn’t completely rule one out, which is part of the reason why Barochez and others doubt that the Pound will be able to build meaningfully on its pre and post-election gains in the short-term.
Above: Pound-to-Dollar rate shown at weekly intervals.
“With uncertainty around the outcome of the general election now eliminated, more clarity has been restored with regards to the Brexit process thereby providing more support for the pound between 1.3300-1.3500. The pound’s upside potential is dampened by the prospect of a harder Brexit deal under the new Conservative government. Markets will now begin to look to UK data, and the Bank of England, as the key drivers of the pound and to see whether the cleared path to Brexit will restore business sentiment and investment,” says Friz Louw, a currency analyst at MUFG.
Uncertainty over the outcome of the next phase of Brexit negotiations may mean Sterling upside is limited but it doesn’t mean that it’ll be nonexistent, not least of all because of the standstill transition period the UK will enter after ratifying Johsnon’s withdrawal agreement.
Transition will ensure the status quo prevails until at least the end of 2020, which should enable markets to again take their cues from more traditional drivers like UK economic data and Bank of England (BoE) interest rate policy.
With the spectre of a ‘no deal’ Brexit hanging over the Pound like a Damocles Sword ever since the referendum, traditional drivers like economic data and thier implications for interest rates have fallen by the wayside in recent years.
That was especially true of Sterling around key milestones like when Johnson first became Prime Minister and as some MPs were trying to rule out a ‘no deal’ exit through parliamentary warfare with the government, which saw the Pound stop responding to UK data.
The BoE has been sidelined by the Brexit process this year but the months ahead are now widely expected to see the government turn on the spending taps at a time when policymakers are already forecasting that inflation will remain around the 2% target level over the coming years.
That could mean the BoE soon finds itself contemplating another interest rate rise, which would be good for the Pound, so markets will scrutinise the bank’s words closely fior clues about the outlook when it announces its next interest rate decision at 12:00 Thursday.
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