Even though many had been focusing on a short-term Euro weakness against the US dollar, not so much attention had been given to the pound’s consistent outperformance. Cable edged above 1.36 this week, an area not seen since April 2018 and this is raising better prospects for the near-term, especially if technical conditions won’t change.
Last week we’ve focused on US yields and whether the short-end of the curve is signaling a growing liquidity crisis and now we shift our attention to the UK and the pound.
#1 Brexit risks dissipating
Once a Brexit agreement had been reached the FX market had shifted away from this major risk and started to price in better outcomes. Keep in mind that there are still multiple technicalities to settle between the UK and the EU, yet that’s not in the spotlight right now. A no-deal scenario would have been catastrophic for the continent, especially since it would have come at a time when economic activity is already subdued due to the COVID-19 pandemic.
#2 Major technical breakout
Concerning technical analysis, we can notice that Cable (GBPUSD) had broken above a key resistance area in December 2020, located around 1.33. Once the buyers pierced through it, there was no turning back for the major currency pair. Since the beginning of the year, only one week closed in red, all of the other posting gains, as now breakout buyers continue to dominate the order flow.
Based on the current picture, it is possible to see Cable edging towards $1.4 before finding major sellers. It would be important for FX traders to combine technical analysis with fundamentals. The UK economy is facing a major economic backlash and usually, a weaker currency policy had been embraced by authorities.
#3 Year-long US dollar weakness
Alongside the better prospects in the EU-UK relationship, the weakness in the US dollar had been another major tailwind for Cable during the past year. We’ve seen USD bouncing off the lows for a short period, yet the move is still small as compared to the prior drop. Persistent weakness will continue to favor risk currencies.
At the same time, it would be critical to monitor for any major shifts in the global risk sentiment, since that could turn the tide and put the Pound under pressure, alongside other currencies like EUR, AUD, or CAD. Have you been actively trading the Pound for the past several weeks? Share your thoughts in the comments below!