As we begin the year we're taking a look into the outlooks for a number of currency pairs. This is our GBPUSD Q1 Outlook 2020.
Fundamentally Speaking
Economic outlook: In the UK, the Conservatives’ 80-seat majority in the new Parliament means the country is on course to leave the EU on 31 January. There is uncertainty, however, whether a new trade agreement with the EU can be negotiated during the transition period, which is due to expire at the end of 2020.
The UK focus remains on the passage of the Withdrawal Agreement Bill when Parliament returns from its recess in the New Year (7 January). The Bank of England downgraded its estimate for Q4 GDP growth to 0.1%q/q, but acknowledged that business and consumer confidence could pick up in the near term. IHS Markit will release its final estimate of December manufacturing PMI (2 January), with the flash estimate having shown a fall to 47.4, weighed down by lower output and orders components. That was in contrast to the Lloyds Business Barometer, showing a significant improvement in trading prospects for the year ahead.
Overall business confidence in December edged up by 1 point to 10%. It was the fourth straight increase. This month’s rise was driven by the most significant improvement in business prospects since March (up 6 points to 18%), while optimism regarding the economy (down 5 points to 2%) retraced about half of last month’s rise. From a historical context, confidence remains below the long-term average, but less so than in recent months. This month’s survey covers the period from 28 November to 12 December (before the General Election results). The improvement in business prospects this month was reflected in hiring intentions. The net balance of firms anticipating a higher headcount in the year ahead jumped up by 7 points to 12%, back to midyear outturns, although it remained below 2018 levels. The net impact of Brexit on business prospects remained negative, but it was the least negative since January.
The manufacturing sector registered a sharp improvement in overall confidence, rising by 17 points to 27%. The rise partly reflects firms in the industry, reporting significantly less negative Brexit impact on business prospects. It may also partly reflect signs of easing global trade tensions. Services confidence, however, was unchanged at 4%, with firms in the sector being the most negative about the Brexit impact on business prospects. Sentiment in retail was up by one point to 22%, while construction was a little lower at 12% (down from 16%).
Central Banking
UK Chancellor Sajid Javid announced in December that Andrew Bailey, currently FCA (Financial Conduct Authority) head, will take over as BoE Governor on 16 March. Mark Carney has agreed to a short extension of his tenure until 15 March. Minouche Shafik, former BoE Deputy Governor, was apparently ruled out for her Brexit views.
The majority of the MPC has continued to support keeping policy on hold for now and should eventually pivot towards modest policy tightening if downside risks to the central economic outlook do not materialize. Nevertheless, the OIS curve is still pricing in a partial rate cut next year, presumably because lingering downside risks remain with respect Brexit negotiations.
With monetary policy close to its limits across major advanced economies, including the UK, there is now increasing consensus that fiscal policy will have to play a more significant role in the coming years both to counter any future economic downturn and to meet the longer-term challenge of raising productivity growth and therefore sustained economic growth.
Technical Takeaway
Prices have dropped sharply from the [post election euphoria ina classic buy the rumour sell the fact pattern, extending the reversal from the 1.3515 election highs. Price has broken 1.3305 and 1.3205 support levels. This is the start of more important trend support from the 1.1959 September lows, which runs down to 1.2880. At this stage, only a recovery back through 1.3280 would stabilise the market and take us into an upper range. Long term, the break of 1.34 supports my constructive view that the cycle from the 2007 highs at 2.1160 completed at 1.1490 in 2016, with a higher low at 1.1950 this year. As such an eventual recovery towards 1.40 is expected, however it is important to monitor how the market responds to major trendline resistance sited at 1.37/38 strong supply here could see a third and terminal test of descending trendline support to 1.10 as highlighted in the chart.
Check out our Q1 Outlooks for EURUSD, USDJPY and the USD Index.
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Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
Past performance is not indicative of future results.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 75% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!