Forex FOREX PRO WEEKLY #2, GBP/USD May 18 - 22, 2020

Sive Morten

Special Consultant to the FPA
Messages
14,052
Fundamentals

While the Gold market has hit our 1750 target on Friday and fundamental background mostly stands the same - all new details you could find in our recent EUR research, I though that we could update our view on GBP. Besides, daily videos should be enough to update Gold market and many people ask about GBP.

The major concern is how we should be with EUR to GBP relation as they mostly should move in the same direction. So if we expect difficult times for EUR as we've said yesterday, does it mean that GBP should drop as well. On this subject we should take in consideration few moments. First - UK stands in divorce stage with EU and gradually it starts to drift to all-time ally - US. We could gamble on whether UK was knowing about coming Covid or not, but they left EU just in time, escaping huge problems of coordination medical and financial measures to struggle epidemic. Now they could focus on resolving of their own problems and this should much easier to do than in EU. UK has its own specific of economy, households activity not as heavy political structure as in EU, where every minion wants to dictate its wish to the center and a lot of other nuances. It means that we should be ready for decreasing of correlation between EUR and GBP. They will have something common in relation to USD, all assets actually have, but EUR/GBP action could become wider. Now there are three major drivers for UK economy - BoE policy, Brexit negotiations and domestic economy recovery.

Here is few recent events that let us understand overall background...

On Monday the government published a 51-page document including a staged undertaking to allow businesses to reopen, advice on avoiding public transport and wearing face coverings, as well as an 14-day quarantine for most international arrivals. There was a lack of specific detail, though, on what employers should do to ensure the safety of workers and the leaders of Scotland, Wales and Northern Ireland said they were sticking with the existing “stay-at-home” message.

“Prime Minister Boris Johnson’s speech had a muted impact on the pound, with markets focusing on the lack of clarity rather than the slow journey towards the reopening of the economy,” ING strategists said in a research note. ING also noted the increase in short positioning on the pound in the latest CFTC data along with rising uncertainty about UK-EU trade negotiations.


Britain’s economy has reeled from the pandemic, while Brexit talks continue with little progress on major sticking points before a June deadline to agree on any extension of negotiations. The Bank of England last week held interest rates steady at its meeting and announced no further stimulus, although it said it was ready to take further action to counter the coronavirus pandemic’s fallout. The Bank of England said last week that the contraction of the economy in the April-June period could approach 25% and lead to the largest annual decline in more than three centuries.

Its chief economist Andy Haldane said there was a risk that the pandemic would cause a long-term hit to spending by companies saddled with higher debts and by households worried about their job prospects. British retailers have warned the government that its business bailout package of reliefs, grants and loans will not be sufficient to stop the “imminent collapse of many businesses”.

Official data published on Tuesday showed Britain’s death toll from COVID-19 topped 38,000 (now it is above 40K) as of early May, having overtaken Italy as the worst affected country in Europe. Prime Minister Boris Johnson’s plans for easing the lockdown have meanwhile been widely criticised as unclear.

More than three-quarters of Britons have applied for the government’s emergency - and hugely expensive - job retention scheme.

On Tuesday, Britain extended its job retention scheme, in which the government pays 80% of furloughed workers’ wages, by another four months until the end of October.

“Insofar as we do have a current account deficit in the UK I think we always have to consider how the UK appears from the point of view of an overseas investor,” she said. “From a political point of view in the UK, there really hasn’t been anything particularly positive.”

The United Kingdom is racking up new debt at a furious pace: it is due to issue 180 billion pounds of government debt between May and July, more than previously planned for the entire financial year. The country’s debt mountain exceeds $2.5 trillion and its public sector net borrowing could reach 14% of gross domestic product this year, the biggest single-year deficit since World War Two.

Britain’s finance ministry fears government borrowing this year could hit a record 337 billion pounds ($414 billion) due to the coronavirus, the Daily Telegraph newspaper reported late on Tuesday, citing an internal government document. Under a worst-case scenario, where the economy does not recover, borrowing could surge to 517 billion pounds compared with a forecast of just 55 billion pounds for 2020-21 as recently as March, the newspaper said.

In the best-case scenario, a so-called V-shaped recovery, the budget deficit was projected at 209 billion pounds. But the document said this was optimistic, and a more realistic scenario was a “prolonged recovery and some permanent damage to the economy” - a U-shaped recovery. In the latter case, the deficit would fall to 83 billion pounds in 2021-22 and drop to 32 billion pounds by 2024-25, the report said.

The document, which the report said was drawn up for Finance Minister Rishi Sunak, set out a proposed package of tax increases and spending reductions which may have to be announced within weeks to boost investor confidence in the UK economy. Measures could include increasing income tax or value-added tax, ending a system of pension increases known as the “triple lock,” and freezing public sector pay, the report, citing the document, said.

The market has turned increasingly short on the pound over the last 10 weeks, as the economic impact of the coronavirus pandemic — likely to be the worst recession in 300 years — is compounded by the risk Britain will end a post-Brexit transition period on Dec. 31 without a deal with the European Union.

Britain and the EU started their penultimate scheduled round of trade talks via teleconference on Monday, having made little progress on any major sticking points.

Rabobank’s Foley said the fact investors were becoming more alert to the looming risk that Britain will fail to reach a post-Brexit trade deal with the EU could be another reason for the pound trading at levels largely unseen since late 2016. “There’s got to be a very significant risk that, on top of the worst recession for three centuries, you’re going to have confusion potentially at the border (in January),” she said. “The UK government desperately needs some positive headlines.”

“While the additional support for employment is welcome, the cost could quickly start to weigh on investor sentiment especially if second COVID waves emerge going forward,” said Derek Halpenny, head of research at MUFG. The scheme is estimated to cost 49 billion pounds ($60 billion) through to June, and an additional 30 billion pounds to run it through October, he added.


A stronger U.S. dollar sent the British pound to its lowest in weeks on Wednesday after Federal Reserve Chair Jerome Powell delivered remarks in which he said an “extended period” of weak growth may be in store for the United States. Powell said the central bank won’t implement negative interest rates, but warned that “it will take some time to get back to where we were,” pushing the safe-haven dollar higher.

On top of that, Britain’s economy shrank by a record 5.8% in March as the coronavirus crisis escalated and the government shut down much of the country.

“Nobody runs in to take the other side of these moves ever at the moment,” said Kit Juckes, macro strategist at Societe Generale.

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Data published is showed that the UK economy contracted by 2.0% in Q1. The UK publishes its quarterly GDP data relatively late in the cycle — after the US, the euro area and several emerging economies. Nevertheless, it also includes a detailed monthly breakdown, which gives some indication of how the lockdown, which took full effect on 23 March, has affected different sectors of the economy. The monthly figures show a 5.8% contraction across the economy as a whole in March, with output falling in all broad sectors. Looking across the detailed sub-indices, only public administration and defence saw output rise, by just 0.1%. The ONS also reports gains in both IT support, and the manufacturing of cleaning products.
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Looking across the major economies, the hit to GDP in the first quarter has, on balance, been a little smaller — and the UK is no exception in this regard. It is almost inevitable that revisions to the initial estimate of GDP in 2020 Q1 will, for many countries, be much larger than usual. And with only one or two exceptions, the most severe lockdowns were not imposed until very late in the quarter, suggesting that most of the impact will not be apparent until we have data for Q2.

Fathom consulting previously argued that substantial fiscal support packages, in most cases of the order of at least 15% of annual GDP, would be necessary if countries were to benefit from a sharp rebound in economic activity once the worst of the pandemic is behind us. In that respect, the four-month extension of the UK scheme, on more generous terms than expected, is to be welcomed.

Fiscal support packages are a necessary, but not sufficient, condition to deliver a V-shaped recovery across countries. Public confidence will also be key. In order for an economy to return gradually to more normal levels of activity, firms and households will need to be confident either that the threat from the virus has been contained once and for all, or, more plausibly, that the government can be relied upon to bring it quickly back under control should there be a second wave.

Sterling fell after the government reiterated its refusal to extend the Brexit transition period deadline beyond December this year, signalled its unwillingness to compromise in trade negotiations with the EU and said that there would be border checks.

British chief negotiator David Frost said on Friday the major obstacle to a deal was the EU’s demand to include a set of “novel and unbalanced” proposals on a so-called “level playing field” that would bind Britain to EU rules.

The EU’s chief negotiator, Michel Barnier, said the third round of talks was disappointing and that the EU would not “bargain away our values for the benefit of the British economy.”


“We’re getting a few clients asking about whether we’re going to return below $1.20 - that’s the kind of concern that some people are starting to have again,” said Kenneth Broux, FX strategist at Societe Generale. “$1.2166 is really for me the line in the sand for cable - we have to try and close above that level this week and then we have a fighting chance of clawing our way out of trouble,” he added.

The Bank of England’s Governor Andrew Bailey said on Wednesday evening that the bank can help spread the cost of coronavirus to society over time, adding that Britain had choices to make over whether more austerity would be needed. On Thursday, Bailey said that the bank is not considering pushing interest rates below zero, although he declined to rule it out altogether.

More quantitative easing by the Bank of England in June is widely expected, which would hurt sterling.

Georgette Beole, Senior FX Strategist at ABN Amro said the UK GDP contraction, the UK’s slow exit from lockdown, the likelihood more quantitative easing, uncertainty about Brexit and deteriorating investor sentiment will all weaken sterling further. “We expect GBP/USD to weaken towards 1.18 in the coming months. We also expect sterling to weaken versus the euro,” Beole said. Seasonal factors are also weighing on the pound - May is typically its weakest month.

CFTC Data

GBP net position turns to negative territory. Although the value of negative position is not as hard as it was on Brexit rush, but here is the fact - bearish position is constantly rising. Open interest is also rising, hedgers close the shorts, suggesting that chances on upside action on GBP decreases.
1589702457768.png

Source: cftc.gov
Charting by Investing.com



Next week market will keep an eye on Bailey's comments on Wednesday and major subject is negative rates and more easing from BoE. Bank of England governor Andrew Bailey said he isn’t considering taking rates sub-zero. But markets reckon otherwise. Short-dated British gilt yields are back below 0%.

The truth is the coronavirus crisis is heaping pressure on policymakers to do more to support growth. New Zealand has flagged a possible shift to negative rates, just days after Norway cut rates to 0%. Even BoE boss Bailey declined to rule it out altogether. Bailey will take questions from UK lawmakers on Wednesday. Their comments will be scanned closely for any shift in stance.

So,
Now you know the "Circle of problems", guys. Now we could return to the question that we point in the beginning of the research in relation to EUR performance. As you can see - question stands absolutely different. We should not worry on mismatch of our EUR bearish view and possible rising of GBP, but we should worry on faster GBP drop, compares to EUR. Actually there is nothing to add to ABN Amro opinion, his compress thoughts express everything correct - the UK GDP contraction, the UK’s slow exit from lockdown, the likelihood more quantitative easing, uncertainty about Brexit and deteriorating investor sentiment will all weaken sterling further. And I would add one of the worst Covid statistics as well...

We should just place correct accents in this statement. UK government takes relatively good measures to support economy, as Fathom consulting tells. Second - investors mostly immunized to negative economy data. It is curious to expect something different. The major two things that stand on the table is EU negotiations on Brexit and BoE policy.
We see the Brexit is major risk to GBP. As UK as EU stands in epidemic stress. They were not able to agreed in good times, and it will be extremely difficult to achieve agreement in bad times. Guilt yields do not lie, so BoE policy will ease more in the summer. This makes difficult to expect real bullish reversal on GBP within few months probably.


Technicals
Monthly


Here we see that long-term bearish scenario is not broken yet as sequence of LH and LL holds. We have all-time AB-CD pattern and OP target at 0.95. Recent week shows the tail close and GBP performance shows the importance of Brexit negotiation driving factor, as, mostly, the drop was driven by this factor. Since GBP has no valuable supports till the 1.14 bottom - price could easily fluctuate there without risk to break long-term balance.

Monthly trend is turning bearish right now, the April month was bullish grabber but now it is erased by price action. Market has to return back to 1.28 top to re-establish bullish status quo. Fundamental background tells that it is difficult to achieve. We have the same grabber as on EUR, but as it was triggered by pandemic and mostly was an extreme low - it is tricky.
gbp_m_18_05_20.png


Weekly

Actually, the pattern that we have on weekly chart is a big test for GBP. This is, in fact, monthly bullish grabber that takes the shape of huge bullish engulfing pattern on weekly chart. Nearest few weeks should answer the question - whether recent upside jump out from 1.14 lows is price rejection and emotional relief of pandemic impact or real recovery. Our task here is to see how price response to support areas. Erasing of this pattern will be hard impact on bullish ambitions and could trigger drop to 1.05 target. Fortunately, GBP has 1.17 monthly OS level support that should hold the pace of collapse, if it will start.

If pattern will be valid, upside action could reach 1.30 area. As you understand the bets of this value are not occasional. As under action to 1.32 as under drop to 1.14 definitely should be some important fundamental driving factors. So, here we mostly are hostages of future political events rather than technical factors and patterns.
gbp_w_18_05_20.png


Daily

So, when the dogs bark, the camels just keep walking. Thus, we also keep going with our trading setup, despite that background is negative. Our suggestion on deeper drop is seemed to be correct. GBP has broken 3/8 Fib level and passed through the OP target as it doesn't exist. Daily Oversold level stands at the same 1.17 area as monthly one. So, it doesn't prevent reaching of 5/8 Fib support.

Daily XOP has weak platform as it stands in "free space" and above 5/8 Fib support. It means that on Monday we have to keep watching without taking any positions by far.

gbp_d_18_05_20.png


Intraday

4H time frame tells the same - acceleration right to 1.27 butterfly target and OP makes us to ignore them as odds on reaching 1.618 butterfly extension, or even XOP looks significant. Probably it should be better to us, as XOP agrees with daily 5/8 Fib support and this is our primary area to watch for. In fact, it should give the answer whether cable will turn down or not. Drop below 1.1860-1.1880 tells that bullish context is not reliable.

Finally, we have to follow the same strategy - check for real bullish reversal patterns on 1H chart once market hits every next support area. Now we do not have anything of this sort.

gbp_4h_18_05_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,052
Greetings everybody,

Gold also was hurt by positive news of vaccine good tests, but it was just in time to complete our 1770 target. Although yesterday reaction was seemed strong, but today it chills out a bit and now we need to see the durability of reaction - whether it was just emotional splash or real change in market's sentiment.

Theoretically, as major butterfly target is hit - potential drop to 1650 keep nothing curious. This is normal 3/8 retracement that happens most times, after butterfly pattern. But, it could happen, that reaction will be even smaller. Anyway - bulls have nothing to do by far. Major trade is over and we need to wait for pullback, despite of its depth:
gold_d_19_05_20.png


On 4H chart, potentially we could get H&S pattern, if indeed, vaccine news make long-term effect. But first - market has to break 1715 trend lines cross. This is the key to downside action. Failure to do this means upside continuation, or at least re-testing of 1770 area again (as our daily OP has not been hit totally):
gold_4h_19_05_20.png


On 1H chart vaccine power should be enough to push gold at least to 1715. So, bears could consider taking of scalp short position around 1750 with stops above 1770 - just keep an eye on possible bearish patterns. Probably it will be either "222" Sell or Double Top, if 1770 will be re-tested. "222" seems more probable...
gold_1h_19_05_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,052
Greetings everybody,

we keep going with our intraday setup on gold and now price stands at the point where you have to make a decision. For the bulls, as we've said - nothing to do yet as market is still coiling around the top. It seems that recent news was not significant as initial optimism is blowing out gradually:
gold_d_20_05_20.png


On 4H chart the major retracement is yet to start as market is showing pullback now. As we've said previously, it should re-test at least daily triangle borders. If any retracement happens at all...

Today the major thing here is bearish grabber that we could get within few hours:
gold_4h_20_05_20.png


And here is why... Take a look at 1H chart everything is ready for bearish trade that we've described yesterday. Upside action to 5/8 level is done, XOP is hit. Thus, market has to turn down right here. Or no downturn happens at all and price returns back to the top. Thus, if you have bearish view - consider short entry.
gold_1h_20_05_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,052
Greetings everybody,

So, yesterday bearish setup on intraday charts has started, but on daily it is unclear yet the target of this drop. In fact, on daily overall situation is yet to be clarified. Market now is coming to MACDP line and former triangle support border. And it could be combination of bullish grabber around. This is first scenario that we have to watch.
Second - if, still, price breaks through this level - chances on deeper retracement will be much better. So, daily traders still have nothing to do yet as we neither have confirmation of immediate upside continuation yet nor signs of deeper retracement.
gold_d_21_05_20.png


So, our major chart to watch is 4H. And first - COP target around 1730. It stands above "B" lows and around daily MACDP line. It means that if grabber will be formed on daily - here, on 4H chart we could get upside butterfly. Those who keeps shorts - think about some profit taking around COP and no doubts you already should have your stops on breakeven.
gold_4h_21_05_20.png


If breakout still will happen - we start to consider deeper targets.
 
Messages
198
Greetings everybody,

So, yesterday bearish setup on intraday charts has started, but on daily it is unclear yet the target of this drop. In fact, on daily overall situation is yet to be clarified. Market now is coming to MACDP line and former triangle support border. And it could be combination of bullish grabber around. This is first scenario that we have to watch.
Second - if, still, price breaks through this level - chances on deeper retracement will be much better. So, daily traders still have nothing to do yet as we neither have confirmation of immediate upside continuation yet nor signs of deeper retracement.
View attachment 53812

So, our major chart to watch is 4H. And first - COP target around 1730. It stands above "B" lows and around daily MACDP line. It means that if grabber will be formed on daily - here, on 4H chart we could get upside butterfly. Those who keeps shorts - think about some profit taking around COP and no doubts you already should have your stops on breakeven.
View attachment 53813

If breakout still will happen - we start to consider deeper targets.
breakout looking likely
 

Sive Morten

Special Consultant to the FPA
Messages
14,052
Greetings everybody,

So, Gold has shown even better performance yesterday than we've expected, as price has hit OP target on 4H chart, while we were watching for just COP.

Now we're coming to important moment that should clarify whether we will get deeper retracement or not. Market is flirting with MACDP line on daily and price needs to close above 1734 to form the bullish grabber:
gold_d_22_05_20.png


On 4H chart price stands at K-support and Agreement with our OP target, forming "222' Buy pattern. As you understand, this construction together with potential daily grabber could mean something and gold could start upside action right from here. But the problem is whether grabber will be formed or not and second - today is Friday.
gold_4h_22_05_20.png


1H chart shows divergence as well and market now stands in upside reaction. Actually there are only two ways - either take long position on minor pullback of current upside action when it hits OP/XOP with stops against the lows and then watch for grabber. Or, conservative way - do nothing, watch for grabber. If it will be formed - try to buy on pullback on Monday:
gold_1h_22_05_20.png
 
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