Sterling Set To Ease Of Transition Period Euphoria

This article originally appeared on FXStreet.

It has been a very data intensive week for Sterling combining key macro releases with major Brexit-related headlines and the central bank meeting. Basically, everything important that could possibly happen to Sterling over the monthly cycle of macro releases was compressed to three days of the fourth week of March.

The GBP/USD started the fourth week of March at 1.2920 level and although no major macro news affected the pair on Monday, the news of the UK agreeing transition period after Brexit to be prolonged till December 2020 boosted Sterling to fly as high as 1.4080. In fact, the transition period announcement stole the spotlight off the European summit scheduled for Thursday and Friday. On Friday, the European Union leaders formally approved 21-month transition period to help business adapt after Brexit, telling the bloc to ride the “new dynamic” in looming trade talks. 

The UK Prime Minister Theresa May welcomed the approval of transition period saying that “this gives certainty to people and businesses. It gives them the clarity to plan for their future.”

The decade of UK inflation February 2008-February 2018

Macro summary during following days was overly Sterling positive with headline inflation decelerating to 2.7 percent over the year in February and more importantly the average weekly earnings including bonuses rose 2.8 percent in three months to January. At the same time, the UK labor market report showed the unemployment rate ticking down to the lowest level since 1975 of 4.3 percent for three months to January period of time. Combination of decelerating inflation and rising nominal wages, although still keeping real wages in negative, is a positive trend for the Uk economic outlook. This in combination with retail sales rising 0.8 percent m/m in February resulted in a surprisingly upbeat twist in the voting pattern of the Bank of England’s Monetary Policy Committee (MPC) last Thursday. Although the MPC voted in favor of keeping the Bank rate on hold, two external MPC member Ian McCafferty and Michael Saunders turned hawkish voting in favor of 25 basis point rate hike. Unexpectedly hawkish turn saw GBP/USD rising to the highest level since the beginning of February of 1.4220.

The news coming from the other side of the Atlantic including Federal Reserve Bank widely anticipated interest rate hike was pretty much priced in the FX market and while the Federal Reserve’s dot-plot failed to deliver hawkish surprises in prediction of more than currently forecast three rate hikes in 2018, the US Dollar was sold-off in reaction to FOMC meeting.

Moreover, the US President’s recent pressure on implementation of selective trade tariff implementation policy is seen hurting the US economy long-run and saw global equity markets selling off after China moved forward with retaliation steps.

Technically the GBP/USD is finally reversed off the descending channel and started to move higher. The GBP/USD is currently moving in the upward sloping channel with key directional indicators including Momentum and Relative Strength Index pointing upward. With Slow Stochastics moving to the Overbought territory by the end of last week, the near-term outlook for GBP/USD is tilted to the downside toward 1.4100-1.4050 level.

GBP/USD 1-hour chart with comments

Bank of England turning hawkish

The Bank of England kept May rate hike as probable action while keeping rates on hold on its meeting last week. The expectations for May rate hike rose after February Inflation Report in which the bank said that “monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated” back in November last year.

The key hawkish twist of the in monetary policy stance in March has been formed by the policymakers voting pattern turning 7-2 after unanimous voting in the previous meeting. Both external Monetary Policy Committee members Ian McCafferty and Michael Saunders voted in favor of 25 basis points rate hike in March, signalling that the rate hike move is set to materialize soon while the monetary policy statement in March said “ongoing tightening of monetary policy over the forecast period will be appropriate to return inflation sustainably to its target at a more conventional horizon.”

GBP/USD technical analysis

During the fourth week of March, buyers overcame the 1.4000 psychological level, after breaking out of a bull flag. The next hurdle for bulls will be to break above the 200-period simple moving average which is now very close to the 1.4300 figure. The high of the year is less than 50 pips above the 200-SMA, at 1.4346 forming a near-term resistance area between 1.4300-1.4350. If the bulls manage to break above this wall the next scaling point is seen at the 1.5000 figure quickly followed by the 1.5185 which is the 61.8 percent Fibonacci retracement from the 2014-2016 downtrend. A long-term resistance area is at 1.5000-1.5185. Since 1.4000 level representing former resistance has been broken to the upside, this price level now should become support and therefore the first important scaling point. Further down is the 1.3700 price level, which is the last cyclical low on the daily chart and therefore also an important psychological support level that bulls will likely try to defend if reached. If the 1.3700 level is broken by the bears, then the market is likely headed back to the 1.3500 figure, back to levels from the beginning of 2018.

GBP/USD weekly chart

While market broke the bull flag on the upside last week, GBP/USD is en route to test former 2018 highs seen at 1.4346. Since the beginning of March buyers had the upper hand leaving sellers only with four bear bars within this month only. As the GBP/USD is trading above both its 100 and 200-period simple moving average and the RSI and MACD indicators are both showing signs of strength the bull trend is still in place.

GBP/USD daily chart

The bulls failed at the 1.4200 level, however, they managed to form a small support base at 1.4100 from which they are currently launching an assault to re-conquer 1.4200. If they succeed the next wall is going to be the 1.4300-1.4350 psychological level and high of 2018. A breakout above that area would likely see the market gain more traction toward 1.5000-1.5185 as discussed on the weekly chart analysis. On the flip side, if the bears show to be more aggressive in the 1.4200-1.4350 zone, support is seen at 1.4000 psychological level, followed by 1.3900 with both the 100 and 200-period simple moving average nearby. The last bastion for bulls is seen close to the 1.3700 level which is the cyclical low. A breakdown below this level might be put the bull trend in danger. But before thinking of such scenario, the market shall first decide what is going to happen near the 2018 high level.

GBP/USD 4-hour chart

Next week in figure

The fourth week of March was very intensive in term of macro data with inflation, labor market and retail sales figures out. On the top of it, we saw the Bank of England turning hawkish with two out of nine MPC members voting in favor of 25 basis points rate hike last week. While the expectations of May rate hike ate increasingly probable, the short term macro picture is playing well for Sterling.

The only important, but still only backward-looking indicator scheduled for next week is the final revision of the fourth quarter GDP scheduled for Thursday. The market is expecting Q4 GDP to rise unrevised 0.4 percent over the quarter while increasing 1.5 percent over the year. Given the backward-looking character of this macro release, it is unlikely to have any huge effect on GBP/USD unless it deviates substantially from the consensus forecast.

UK economic calendar for March 26-31

On the other side of Atlantic, the most important macro releases next week include final revision of the fourth quarter GDP that is expected to rise 2.6 percent y/y and the core personal consumption expenditure price index, Fed’s preferred gauge of inflation, that is expected to rise 1.5 percent y/y in February.

Otherwise, personal income and personal spending data are due, regular weekly jobless claims data and a whole range of Fed speakers that are set to confirm Fed’s recent dovish rate hike view.

US economic calendar for March 26-31

Forecast for next week

Giver the spot price of GBP/USD turning bullish during the fourth week of March, the latest FXStreet Forecast Poll is pretty conservative with 54 percent majority of participating analysts and economist forecasting bearish trend in the 1-week horizon. 38 percent of participant expect bullish trend to prevail next week while 8 percent anticipate sideways trading. With technical picture favoring the bullish move in the mid-term horizon, this scenario is reflected in forecasts for 1-month ahead. 

Forecasters are turning slightly more hawkish on GBP/USD in 1-month time from now with 50 percent of participants in FXStreet Forecast Poll expecting bullish trend to prevail compared to 39 percent of bearish forecasters. The 1-month horizon bearish forecasters actually slipped massively from 64 percent of participant forecasting bearish trend two weeks ago, to 50 percent bearish forecaster last week and now only 39 percent of bearish forecasters.

Contrary to the technical outlook for GBP/USD, the 3-month forecasting horizon is still mostly bearish with 48 percent of forecasters at FXStreet Forecast Poll expecting a bearish trend to prevail in 3-month time from now. 

Uncertainty over the path of GBP/USD future development is also given the tight range of  119 pips only between the highest and the lowest median call of the Forecast.

FXStreet Forecast Poll