Most people will be glad to see the end of 2020 and hope that 2021 will be a better year, however, for anyone trading the British pound the year is not over and they will be looking at what happen to the value of sterling as we head to the Brexit deadline.
This question has been affecting currency markets which have been experiencing volatility ever since Britain voted to leave the European Union on the 23rd June 2016.
Four years have passed and with only a few days left before the 31st of December 2020 deadline, the UK is still negotiating a Brexit deal with the EU. So far, both sides have failed to achieve a breakthrough on two key points: fishing rights and fair business competition or what is better known as “level playing field”.
The coming three weeks will be crucial. Having a new deal with the EU would help limit further damage to businesses as they desperately attempt to recover from the pandemic which caused UK GDP to crash by 20% and caused sterling (GBP/ USD) to plunge to thirty-year low of nearly US$1.14 in the month of March.
No one is sure how Brexit might affect trade between Britain and the European Union, but GBP traders appear to be remaining optimistic, which could mean that many of the downsides of a “no-deal Brexit” are already priced in. Most importantly, the pound exchange rates have shown little reaction to the constant failure in talks between the EU and UK leaders. Negotiations seem increasingly far apart and yet every sharp decline in GBP/USD has been followed by a strong bullish rally.
We have been advocating a “buy-the-dips” strategy for sterling since May 2020 following multiple consecutive rebounds from the US$1.21 weekly support levels. Not only did the pound rally nearly 10% since then but it also surged above the key 200-period moving average (orange line) setting the pair on a bullish uptrend.
From a technical perspective, the US$1.3450/ 1.35 resistance area continues to hold back the pair from surging to pre-referendum levels. This important key level has been tested on three previous occasions:
- The first time in December 2019 when sterling staged its biggest rally in almost three years after the pro-Brexit Conservative party secured a decisive victory in the general elections. The pound jumped to US$1.35 marking its highest level since May 2018 and its biggest rise since 2017.
- The second time in August 2020 following the coronavirus-induced crash. The pound rose in the fastest winning run in a decade climbing from nearly US$1.14 to US$1.3475 in a little over 5 months. It was a dramatic turnaround for sterling, which plummeted to the lowest level in more than three decades. The rally was mostly driven by the greenback’s drop. The dollar index fell every month since the end of March.
- Finally, and more recently in September 2020, the pound dipped to US$1.27 after Brexit deal negotiations hit an impasse and the EU took legal action over the Internal Market Bill (IMB). Sterling relentlessly rallied back to our resistance zone reaching 1.3530 in only two months.
Looking ahead, and although the pound registered a 30-month record close on the weekly chart, it still must seal the deal by printing a close above the 12-year trendline which coincides with the US$1.3450/ 1.35 resistance level.
Once this level is cleared (weekly close above trendline), Fibonacci 2.618 level has the pair set on an uptrend with US$1.4225 as target. This bullish view will remain intact as long as sterling persists above the 1.618 Fibo level at 1.3150, with the 200-period SMA (orange line) as the last line of defence.
As we close 2020 and the uncertainty about Brexit continues to build, it may be that the British pound surprises many people and provides an unexpected upside to the UK leaving Europe.
For more information about Brexit, read our Brexit Financial Guide.
Chief Market Analyst at SquaredFinancial
Rony has over twenty years of experience in financial planning and professional proprietary trading in the equity and currency markets. Prior to joining SquaredFinancial, Rony educated and coached numerous traders helping them find their edge and arming them with proven trading methodologies to successfully battle the markets. Rony obtained a B.S. in Finance from Concordia University in Montreal, and his professional designations include Certified Financial Planner CFP® obtained from the Canadian Securities Institute.
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