Sterling Soars

Intermediate
  • GBPUSD has broken the corrective channel as the 200-day moving average is surpassed
  • The 50-day moving average is proving harder to break
  • The economy is staging a recovery; debt is manageable
  • Taxes will rise, but the public will understand

If one looks at the long chart of GBPUSD over the past nine-years, shown below in Figure 1, one can see the spot price has recently edged passed the upper limit of a corrective channel [A] stagging a strong break over the 200-day moving average (dma). However, so far, as will shown below, the drive higher [B] in GBPUSD has not clearly escaped the gravitational pull of the 50dma metric, Figure 2.

GBPUSD Chart From 2012
Figure 1: GBPUSD Chart from January 2012 Source:investing.com, Spotlight Ideas

Trading in GBPUSD closed at 1.4015 on Friday, February 19, and such is the technical sentiment that one might feel this positive movement will now press on to try the next clear target at 1.41.

A bullish outlook…near-term

GBPUSD has a bullish long-term outlook as there appears to be little sign of bearish intervention. One reason for this encouraging outlook is the observation that the U.K. economy has stabilised after the third lockdown to counter COVID-19 initially harmed retailers and other business enterprises.

The IHS Markit/CIPS UK Services PMI jumped to 49.7 in February 2021, up from 39.5 in the previous month above market expectations of 41.0.  The latest reading was the mildest  decline since the contraction began last November.

New order volumes and employment numbers decreased marginally, while business optimism improved to the strongest level since September 2009.

There is another boost for Sterling as U.K. Gfk Consumer Confidence index rose five points from January to -23 in February 2021, beating the consensus of -27. This was the highest reading since March last year, as prospects for a recovery in the economy improved amid vaccination rollouts and falling numbers of daily coronavirus infections and deaths.

There were improvements in four sub-indexes: personal finances over the next 12-months (4 vs 2 in January); economic situation over the last 12-months (-64 vs -67); economic situation over the next                       12-months (-30 vs -44); and big purchases climate (-19 vs -24). This has driven a new break over the 50dma; but will it last?

Figure 2: GBPUSD 12-Month Chart Source: www.investing.com, Spotlight Ideas

Figure 2 shows that even with the clear break of Spot over the 200dma one will see that since the end of November 2020 Spot has dancing back forth around the 50dma. In each break until now, Spot has not broken away to the upside. So, one must wonder if the latest move will prove to have more success.

A bullish outlook…medium-term

GBPUSD has a bullish medium-term outlook. This positive perspective is driven by the ascending channel [B] in Figure 1, it has almost become self-propelling. The fact that GBPUSD pushed past 1.39, the news that the Bank of England expects a strong subsequent recovery and that on Monday, February 22 the Prime Minister, Boris Johnson will announce  the next steps in England’s…note not the U.K.’s  lockdown are all Sterling positive.

British borrowing slows

Public sector borrowing of GBP 8.8 Billion (USD12.3 Billion) is the first January deficit in a decade, however, it was well below the figure of GBP 24.5 Billion (USD 34.2 Billion) that was forecast in a Reuters poll.

This has taken borrowing since the beginning of the financial year in April to GBP 270.6 Billion (USD 376.1 Billion) that has been driven by the rise in spending and tax cuts ordered by the Chancellor Rishi Sunak. What is not recorded here are the losses on government-backed loans, however, the deficit is likely to be smaller than official forecasts.

The economy will be supported as the Chancellor is likely to extend the wage subsidy furlough programme  for the hardest-hit sectors. Eventually, there will be higher taxes, but it is likely the electorate will understand the reasons why it must be done.

Sterling will be supported as the U.K. looks as though the economic path is on a “J-Curve” trajectory.

GBPUSD One month chart
Figure 3: GBPUSD One-Month Chart and Technical Sentiment Source: www.investing.com , Spotlight Ideas

Figure 3 portrays a bullish sentiment and over the next few weeks the GBPUSD pair one can look for a first serious test to 1.4215. Stop set at 1.3858.

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d... Continued

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