GBP/USD Weekly Outlook: Sterling set to fall prey of post-Brexit trade deal between the UK and EU

The GBP/USD has been in a corrective mode throughout the last full week of February with the currency pair falling some 50 pips to trade just below $1.4000 level on Friday.

The broad-based US Dollar strength was supported by the US benchmark Treasury yields development with 10-year bonds yielding as much as 2.98% during the last week. In support of the US dollar was also an overly positive tone of the FOMC January meeting minutes that saw Fed presidents optimism over the future growth and partly inflation outlook, providing support to both interest rate hikes and the US Dollar.

With ongoing pressure on the UK Prime Minister Theresa May from within her own Conservative party, many open questions remain before the key trade negotiations with the EU begins next week. The trade negotiations should be crowned by Theresa May’s speech on Friday, March 2, next week. Her speech is also key risk event for the GBP/USD for the week ahead, that with exception of manufacturing and construction PMIs lacks any other important macro data. The UK and EU trade deal negotiation with Theresa May speaking on the results are scheduled for Friday, but with no specific timing for the event.

On the macro front, the UK labor market data saw fairly disappointing unemployment figure that has ticked up to 4.4% for the three months to December, while average weekly earnings accelerated to 2.5% y/y. Pick up in wages is generally considered a positive signal for Sterling, but markets saw whole labor market report slightly disappointing because of the unemployment leaping off four decades lows.

The technical picture for the GBP/USD is mixed. While long-term trends derived from weekly chart sees currency pair locked in the upward sloping trend, the daily picture sees GBP/USD capped in a corrective triangle. The short-term picture also sees GBP/USD well supported at around $1.3900 level.

Should bullish trend prevail on GBP/USD, next target for the currency pair is to break above 1.4000 psychological level that equals also to 38.2% Fibonacci retracement of recent upmove from 1.3770 towards 1.4150. Next target on the upside is 1.4050 represented by minor Fibonacci retracement and finally, 1.4100-1.4140 zone which is the last two weeks’ swing high.

Technical outlook
GBP/USD weekly chart

The price is contained in a bullish channel and has tried to test the 200-week moving average which is now acting as a dynamic resistance. The GBP/USD currency pair hit the key level of 1.4130 level representing 32.8% Fibonacci retracement tracking the GBP/USD long-term movement from November 2007 to September 2016.

GBP/USD daily chart

On a daily chart, GBP/USD is trading above both 100-day and 200-day moving average which can be viewed as bullish momentum. The pair is trading within upward trending bullish channel. After reaching the cyclical high of 1.4343 earlier this year the price is now consolidating in a triangle formation which is a compression pattern. A breakout in either direction will likely provide a measured move equal to the base of the triangle (red rectangle). A bullish breakout from the triangle on the upside should target 1.5000 level while bearish breakout could see the currency pair targeting 1.3000 level, both strong psychological levels. Since the trend on a daily chart is sloping upwards, bears have to overcome 100-day and 200-day moving average first before reaching 1.3000 target.

GBP/USD 1-hour chart

The GBP/USD is now trading around 1.4000 level with the market sharply reversing from the 1.3900 psychological level. Should bullish trend prevail, next target is to break above 1.4000 psychological level that equals also to 38.2% Fibonacci retracement of recent upmove from 1.3770 towards 1.4150. Next target on the upside is 1.4050 represented by minor Fibonacci retracement and finally, 1.4100-1.4140 zone which is the last two weeks’ swing high.

To the downside, Thursday’s low of 1.3860 is the next target with a break below opening the way for further downside to 1.3800 round big figure and the reversal point from February 14, 2018. Next key support is seen at 1.3765 represented by key reversal point from February 9t, 2018.  

Week ahead
The Bank of England Deputy Governor Jon Cunliffe headlines calendar events on Monday with a public speech at the renowned Philosophy/Politics/Economics (PPE) Society speaker series, in Warwick. Unlike parliamentary hearing of February Inflation Report, at which Governor Carney reminded MPs that the Bank might be raising rates three times instead of originally estimated two hikes while remaining foggy on timing on the move, the University speech from Jon Cunliffe might be a bit more academic or even motivational.

For the rest of next week auctions of government bonds are scheduled and the forward-looking purchasing managers’ indices in both manufacturing and construction are scheduled for Thursday and Friday respectively. Although both are considered rather second tier type of economic indicator, should the actual figure deviate substantially from expectations, they might mover the FX market.

UK economic calendar for February 26-March 2

On the other side of the Atlantic, key events concentrate in the middle of next week. On Tuesday, February 27, the US durable goods orders are due with core durables expected to rise 0.2% m/m in January. New Federal Reserve chairman Jerome Powell will take the center stage on Wednesday, February 28, with his first Congressional testimony presenting the semiannual Monetary Policy Report before the House Financial Services Committee, in Washington DC.

Meanwhile, the fourth quarter US GDP is expected to rise 2.5% on an annualized basis.

For Thursday the second day of Powell’s Congressional testimony is due while the ISM manufacturing PMI is seen decelerating to 58.6 in February.

Forecast Poll
The FX Street’s Forecast Poll for GBP/USD turned neutral for the upcoming week, as exactly 50%-to-50% of participants were split on GBP/USD’ s direction for the next week. While technically the GBP/USD is supported and the long-term being still on the upside, the beginning of the UK-EU trade dealings represents an unpredictable political risk. I expect the first round of the trade deal to remain undercover with key negotiator refraining from negative comments, therefore I expect the positive momentum from the last Friday to carry over to the upcoming week with GBP/USD targeting $1.4000-1.4130 levels.

FXStreet Forecast Poll