January 17, 2018 Facebook  twitter  Google+
British pound is preparing for a strong rally, 1.36 level is in the focus
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At the beginning of the year, British currency, along with the European one, is at the spotlight of entire FOREX currency market. Indeed these days there is an interesting market background happening with the British pound.

GBP/USD has come close to an important historical level of 1.36, and now it looks like that the market has met all the necessary conditions for breaking through this resistance level and moving further in ‚Äč‚Äč1.4045-1.4095 area. Perhaps we are witnessing the emergence of a new medium-term market trend, such moments are always interesting, not to mention the opportunity to take part in the large-scale market movement. We will try to analyze the situation on the GBP/USD market and talk about the recent dynamics of the British currency.

British currency ended 2017 very successfully, and the beginning of the new year brings good time for the British pound as well. While the British PMI in production and construction, announced earlier this week, was slightly worse than expected, PMI in the service sector surpassed all optimistic expectations. UK PMI in the service sector in December 2017 was 54.2 points. Given the outpacing nature of PMI data, the growth in UK GDP should remain strong in the coming months, despite Brexit risks, which were so much talked about last year. The services sector is dominant in the UK economy, and the latest statistic data were well received by FOREX market. In addition, one of the main drivers of the British currency strength is the starting economic boom in the euro area. British pound may continue to gain thanks to European economic growth, and historically low value relative to other currencies.

Thanks to the acceleration of manufacturing PMI and stronger economy, Europe is likely to maintain high GDP growth rates at least in the first half of 2018. But weak European inflation restricts tightening of monetary policy, and investors will not see the transition to higher rates for a long time in Europe. The last European inflation data is a kind of confirmation for this. January 5 Friday’s data on European inflation showed a decline in the inflation index (CPI) from 1.5% in November to 1.4% in December. In this sense, this is a positive moment for the British currency, a signal to possible euro decline, amid softer monetary policy and European economy stimulation.

GBP/USD chart suggests that  there is bullish market sentiment. In addition, higher GBP/USD time frames (daily and higher) indicates the technical figure of continuation tendency - the classic flag pattern. This week GBP/USD approached the resistance line of medium-term uptrend, which starts in March-April 2017. The last time GBP/USD was trading above 1.35 in December 2017, then the pound looked overbought, plus Brexit negotiation added nervousness to the entire market. An earlier attempt to gain a foothold above 1.35 was also unsuccessful, it was the end of September 2017, pound was also overbought.

This time, despite the fact that GBP/USD is trading above 1.35, the pound remains out the danger zone and does not look overbought, on the contrary, we see a healthy tendency to realize an upward momentum after consolidation and accumulation of the required market volume. Checking the data on net open speculative positions on CME.GROUP, it is clear that the total aggregate position on British pound futures does not have bullish extremes. This confirms that pound remains out of the danger zone while the sentiment in the British currency market is clearly bullish. Looks like the British currency has the space to gain without risks of short-term speculative longs close.

Of course, given the political nature of Brexit negotiations, which were postponed till March 2018, one cannot help but mention the considerable uncertainty about the future of trade relations between Britain and the European Union. These risks prevent most investors from keeping the pound positions, taking into account the risks if the parties will not be able to reach an agreement and formalize trade relations. If Britain withdraws from the European Union without a deal, the negative impact on its economy will be huge, given the scale of its economic interaction with the European region. However, what are the chances for such an outcome? Despite the fact that the negotiations have long acquired a political character, neither in England, not Europe are interested in worse case scenario realization.

In general, the economic recovery in Europe, bull sentiment in GBP/USD market and historically low levels of the British pound (the minimum levels ‚Äč‚Äčfor the last 30 years) are significant drivers for the continued growth of the British currency. However, GBP/USD market will remain quite volatile at least until March 2018. In this case, the breakup and consolidation above the resistance level 1.36 will bring the GBP/ USD pair first to 1.40 and then to the level of 1.47. We will see how the market acts, now all the attention to the 1.36 level.

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