Sterling is Currently Enjoying a Purple Patch
The performance of sterling has been remarkable of late. After the Brexit shockwaves of 2016, GBP fell precipitously against competing currencies, plunging to multi-year lows of 1.18 to the USD, while racking up massive declines against the EUR, CHF, JPY, and CAD.
As fate would have it, the remarkable resilience of the UK economy has put paid to the notion of an inexorable British decline. Step-by-step, the UK economy – ably assisted by the governorship of Mark Carney – has remained sound. The recently recorded GDP growth rate is 0.4 %, up markedly from the prior reading of -0.2%.
The unemployment rate is holding steady at 3.8%, and inflation remains below the targeted figure of 2% at 1.3%. The Bank of England (BoE) maintains that for robust economic growth to take place, an inflation differential of 2% must be maintained, while pushing towards full employment and stable prices. Currently, the UK government Debt/GDP ratio is 80.8, down from the previous figure of 82.6. These economic indicators, diverse though they may be, are generally positive and reflective of an economy on sound structural foundations.
When Brexit proceedings were finalised and signed into law, the UK officially began the arduous process of extricating itself from the European Union. The bill was approved on 9 January 2020. The House of Lords signed off on the legislation, followed by some changes by the House of Commons. The Queen passed Royal Assent and allowed for the formal approval of Britain to leave the European Union.
All of this was made possible by prime minister Boris Johnson’s decision to hold elections on December 12, 2019. Brexit would not pass had it not been for the significant majority that the Tories received in the last election. This ends the 4-decades long marriage between the European Union and the United Kingdom. However, this is only the beginning of a lengthy process which will continue throughout 2020. The UK is still beholden to EU legislation throughout 2020, without any official legislative power in the European Union.
The impact of the recently signed Brexit legislation has been remarkably bullish for the GBP. This is evident in the GBP/USD currency pair (and others), which is currently trading above the 1.3000 level. The technical indicators are strongly bullish for the cable, indicating a net Buy rating. In terms of oscillators, the consensus is a Buy, with Momentum Indicators and Bull Bear Power oscillators on the GBPs side. In terms of moving averages, optimism is less apparent. Forex trading activity appears to be erring on the side of caution with net put options on GBP/USD, thanks largely in part to short-term and long-term EMA and SMA technical indicators.
This reflects the opinions of speculators who believe that GBP bullishness may be pyrrhic in nature. Of course, there are many other considerations to bear in mind on the Brexit issue. Noteworthy among them is the Irish Backstop. Put simply, the European Union wants to ensure that in the event of a free trade agreement with the UK, a level playing field will remain such that the UK will not be able to undercut the competitiveness of the EU. This is standard operating procedure in negotiated trade deals.
Across the Pacific, Asian markets have been roiling with the outbreak of the deadly coronavirus pandemic. The Centers for Disease Control (CDC) and the World Health Organisation (WHO) are among a long list of authorities working feverishly to contain the spread of this deadly virus. According to the New York Times, the death toll is approaching 500, with no evidence of a slowdown.
An estimated 25,000+ people are infected, and these figures will be significantly higher in days and weeks ahead. With the mortality rate at 2%, the coronavirus is substantially less deadly than SARS which had a mortality rate of approximately 10%. Regardless, the fear generated by this deadly outbreak has devastated markets and threatened to rupture the stability of typical safe-haven currencies.
The performance of the Japanese yen is a case in point. It has weakened slightly against the USD in the JPY/USD pair, as expected. The 1-month performance indicates dollar strength in the first week of February as the USD rallied towards the 50-day expected moving average figure. The key figure to watch is JPY 109 – that’s the resistance level. Markets have been hovering between JPY 105 – JPY 115 at the high end.
Based on what are currently seeing with Forex trading activity and the Japanese yen, the USD will continue to strengthen, albeit marginally against this Asian currency. Generally speaking, the Japanese yen is regarded as a safe-haven currency and it has maintained its value well. Towards the end of January, the yen moved up slightly towards 108.94, albeit with limited currency moves.