Sterling Rises to the Challenge
The GBP/USD pair was trading at 1.3398 on December 27, 2017. Sterling was rallying ahead of the Christmas holiday season, and into the New Year. The elusive 1.34 handle has been hard to breach, given lighter trading levels during the final week of the year. USD weakness has been pervasive heading into the final stretch. One of the most important measures of USD strength, the US Dollar Index (DXY) has been hovering around the 93.02 level. The 52-week high of the DXY is 103.82, and the 52-week low of the DXY is 91.01. The 5-day performance of the DXY is -0.31% and the 1-month performance of the DXY is -0.15%. For the year-to-date, the DXY is down 9.14% in line with general expectations in the performance of the greenback. The weaker the DXY, all things being equal, the stronger the GBP component of the cable.
The fact that sterling is moving towards a soft Brexit has helped to bolster the strength of the currency. Brexit-related concerns have long dogged the strength of sterling, leading many to sell the currency. Now that UK negotiators and EU officials have softened the terms of the Brexit, forex traders and speculators will be focusing on the fundamentals of the market including interest rates and inflation. The Bank of Montreal’s strategists at BMO Capital Markets are confident that GBP will rise in 2018. The transitionary period for the GBP will likely take up to two years to complete. There are some concerns remaining, notably the border with Northern Ireland. A soft Brexit will mean that the UK continues to enjoy several benefits associated with the EU single market. The fact that Prime Minister May failed to secure a greater ruling majority in the June 2017 general election was telling. The Tories lack the political capital to push forward with plans for a Hard Brexit.
Will Prime Minister May Push for a Hard Brexit?
If the UK government attempts to push for unpopular measures in the Brexit saga, this could result in another snap election. If that happens, it is unlikely that Prime Minister May will have the political capital to survive against a resurgent Labour Party and Jeremy Corbyn. For all these reasons, the UK approach to Brexit-related matters is heavily tilted in favour of a ‘softer’ Brexit. The final date for the UK to break free from the European Union is the 29 March 2019. That’s the date when Article 50 of the Lisbon Treaty kicks in. Within the next couple of weeks, UK and EU officials have promised to start discussions on upcoming trade and transitionary deals. The UK is unlikely to get any extensions to Brexit-related negotiations since all member countries of the EU must be in agreement for this to take place. Several important points are worthy of mention:
- The GBP/EUR is trading 14.29% cheaper than on June 23, 2017
- The GBP/USD is trading approximately 9.4% cheaper than at June 23, 2017
The strength of sterling is notable against the USD, since it was hovering at 31-year lows in the aftermath of the Brexit vote. In 2017, GBP/USD is up markedly from 1.23 to 1.34 for solid gains against the greenback. Other notable gains for the UK economy include the Q3 GDP revision to 1.7%, up from 1.5%. Trading experts anticipated a GDP growth rate of 1.5%. At current exchange rates, the GBP/USD pair is hovering above its 200-day exponential moving average and holding the line with the 20-day simple moving average. The performance of the UK economy is such that the support levels are hovering around 1.3340, 1.3300 and 1.3260. The current resistance levels are around 1.3385, 1.3420, and 1.3465.
What level is the GBP/USD pair likely to reach in 2018? Will the GBP/USD pair move to fresh highs in the New Year? Is USD weakness likely to continue into 2018?
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.