BXY: British Pound Currency Index – What are investors waiting for to jump in from sidelines?

Fundamentals

After the economy reopened and federal mandates surrounding COVID-19 restrictions were lifted, businesses, consumers, and investors were uncertain about the outlook due to the rise in the delta variant cases. However, the average daily cases reported in the UK have been decreasing in the past 2 weeks which seems to have brought back business optimism as investors await on the sidelines. The British businesses expect to increase hiring and wages as the economy recovers, business restrictions are removed, and the conditions improve. The optimism seems to be the highest in sectors most affected by the pandemic such as hospitality, transport, and construction. Additionally, it is highest in London, North East, and North West; London’s recovery is crucial for the UK’s economy. With optimism and increased wages comes inflation. Approximately 40% of firms expect to increase their prices for goods and services.

Chancellor Rishi Sunak sent a letter to PM Johnson to outline the damages the UK’s travel restrictions are causing to the country’s tourism industry and the economy before the ministers are due to meet and discuss the August travel guidelines this week. In the letter, Sunak urged the Prime Minister to ease the restrictions because the current border policies do not represent the advantage the UK has from its successful vaccine rollout. Approximately 72% of Britons are fully vaccinated and 88% had at least one dose of the vaccine. The ministers have been considering several options to help the recovery of the UK’s tourism industry. They are due to meet on Thursday to discuss the outlook of the industry and the economy. 

Technical analysis

The British Pound Currency Index is currently at a key level as the fundamentals align for investor optimism. The BXY is currently at 139/140 zone which has historically been strong support from 2009 to 2016 when Brexit discussions were initiated. Since then, the Pound has been unable to break above this level, respecting it as a resistance. Now as the price approaches this level again, the current monthly candle made a bottom wick rejection and with the current optimism rolling in, the questions to ask are:

• Are investors starting to become confident in the UK’s outlook?

• Will price break this significant level and the long period of consolidation since 2016?

Last week, BXY made a bottom wick rejection below 137 into a prior consolidation zone. The current range the price is in, 137 to 140, is a historical liquidity zone. Going into the new week, fundamentals will be crucial to breaking out of these zones.