Brexit in the week from 18/5 – 24/5/2020

Fundamental analysis

There are already more than 260,000 COVID-19 cases in the UK. The number of new cases per day has fallen below 2,500. The declining number of new daily cases gives hope that the pandemic is slowly getting under control in this country. 

Figure 1: The development of new cases of COVID-19 in Great Britain

Regarding the end of the lockdown, the government has presented a plan with three phases. The British Prime Minister Johnson said that it was too early to end all measures in a view of the risk of the second wave of the pandemic, but that gradual conditional steps to relax the measures were already being taken. Currently, Britain is at the beginning of the second phase according to the submitted plan.

As for the negotiations on the Brexit trade agreement, no talks were planned for the last week. The status, therefore, remains that there are significant divergences between the EU and Britain, which do not allow the agreement to be concluded on substantive issues. At the same time, Britain announced that it would not extend the transition period. These reports are highly negative for the pound and develops a further pressure on it. Additionally to that, the negative economic outlook and the possibility that the BoE's central bank will cut the key rate to negative values is also bearish for the pound.

Last week, Britain reported data on the labor market on Tuesday, which, in April, showed a strong increase in the unemployed people by more than 856 thousand, exceeding analysts' estimate of 676 thousand. Unemployment in March reached 3.9% (strong growth is expected in April data).

CPI in April fell to 0.8% on year on year basis (1.5% in the previous month), which supports considerations of further interest rate cuts. PMI indicators have improved compared to the previous period, but they are still deep in the economic contraction zone (PMI in services reached 27.8, and PMI in manufacturing is 40.6).

Retail sales in April fell by -18.1% on a month-on-month basis (the previous month reported a decline of -5.2%). 
 

Technical analysis as at May 24, 2020

Last week, the pound moved in the 220-pips band and closed at 1.2165. Overall, the pound is still in a downtrend, which is confirmed by the declining trend line between points A, B and C. At the same time, the support line between points D and E was broken, creating a new lower low below a point E, see Figure 2.
 

Figure 2: The GBPUSD on a weekly chart

On the daily chart, see Figure 3, we can see that the pound has weakened over the last three days. At point G, the moving average of EMA 50 fell below SMA 100, indicating a declining trend. The same constellation of moving averages is currently also on H4 and H1 time frames, which confirms these bearish tendencies. In the given situation, it is more appropriate to look for places where to speculate short (on a price decline).  
 

Figure 3: The GBPUSD on a daily chart
 

The key levels of support and resistance are as follows:

Resistance 1 is at the level of 1.2250-1.2300.
Resistance 2 is in the zone 1.2410 - 1.2470. At the same time, it is near EMA 50 moving average around which the price has recently fluctuated.
Resistance 3 is in the range of 1.2620 - 1.2650.

Support 1 is located in the range of 1.1980 - 1.2000. Here, there is the bottom edge of the hidden 123 gap that formed on the candlestick on March 26, 2020.
Support 2 is in the range around level 1.1400 - 1.1470.

COT report

Additionally to that, we present the overall sentiment of the market, which according to the report COT (Commitment of Traders), which is presented every Friday, brings the following information:

COT report
 

Instrument	Data as at 22/5/2020	Data as at 15/5/2020	Data as at 8/5/2020	Data as at  1/5/2020	Data as at  24/4/2020	Sentiment
British pound	-19 000	-13 700	- 12 000	-6 700	-1 400	Strong bearish
USD index	17 300	16 500	16 400	16 100	15 600	Strong bullish

Last week, big speculators again reduced their overall net position in the British pound. This is the eleventh drop in a row, so bearish sentiment prevails in the pound. Speculators, on the other hand, strengthened their overall net position in the US dollar again for the ninth week in a row, which, despite poor macroeconomic data in the US, confirms that the dollar serves as a strong reserve currency in times of crisis.

 

What awaits us this week?

This week should be quieter for the pound, as there is no significant economic data to be released in the UK. Only on Friday there will be published data on consumer confidence and the development of the price index of sold real estate. Therefore, the GBPUSD currency pair will be more affected by data coming from the USA (on Tuesday - data on consumer confidence in May and sales of new homes in April, on Thursday - GDP and claims for unemployment insurance).

In addition, further developments of the coronavirus disease and the measures taken in this regard need to be monitored on an ongoing basis.