- Frustrated GBP/USD bears fading below 1.3050, looking for dollar strength in US NFP data Friday.
- US data has been a promising start for the year with both industrial and services improving.
- EU/UK trade negotiation uncertainty to weigh on GBP prospects, BoE to cut in May.
GBP/USD bounced off 1.2941 to 1.3035 yesterday and managed to push through to 1.3069 today where bears stepped in, capping the pair for the time being in what is otherwise a choppy consolidation of the August and October break-ups.
The price chops between the 23.6% Fibo and 38.2% Fibo of the August 2019 rally, indecisively as the EU/UK go head to head following the formal departure of the UK from the Union last Friday, marking the beginning of the transition period running until 31 December 2020.
Ears to the ground for Brexit trade progress
While the Bank of England may have been showing a hint of optimism, we have a long road ahead of us in negotiations for which businesses will be keeping their ears to the ground, hopeful of positive progress.
“Both the UK and the EU have published their trade agreement objectives. The most important red lines for the UK are to end regulatory alignment and the jurisdiction of the EU court,” analysts at Danske Bank explained. “For the EU, it is to protect the integrity of the single market and the customs union, securing rights to fish in British waters and ensure the UK does not undercut EU standards (i.e. level playing field conditions).”
The analysts figure that both sides are likely to compromise although unlikely to happen until we are much closer to the deadline on 31 December 2020, as PM Boris Johnson has ruled out an extension and that is where the risk lies for GBP bulls. Hard lined rhetoric from the PM will keep the door ajar for a hard-Brexit.
“We think more GBP weakness is in the cards this year, as we expect investors will become increasingly impatient with the lack of progress. We also expect a 25bp cut by the Bank of England in May, as elevated Brexit uncertainty continues to weigh on business investments.”
For the near term, with the US dollar on the bid, a positive correction in yields and a shakeout in EMs, coupled with the recent run of positive data in the composite back on solid grounds again for the start of this year, Friday’s Nonfarm Payrolls could be the icing on the cake for the dollar bulls and committed GBP bears selling rallies from the 1.3050s.