Trading Cable Heading into the New Year

The GBP/USD currency pair is holding at the critical 1.34 level. The cable has a 52-week low of 1.1995 and a 52-week high of 1.3616. Sterling has been on an upward trend against the greenback in 2017, buoyed by the resilience of the UK economy. Currently, sterling is trading above the 200-day moving average of 1.296 and the 50-day moving average of 1.324.

According to Wilkins Finance trading expert, Montgomery P Smythe, this is an auspicious sign heading into the New Year:

We have seen net positive (call options on sterling) in recent weeks. This is indicative of the bullish sentiment about the UK’s Brexit negotiation proceedings. UK government officials are working hard to reach a settlement with their European union partners. All in all, Brexit secretary David Davis and his EU counterpart Michel Barnier are moving ahead as planned. There are obstacles in their path, such as the border with Northern Ireland, the pensions and payments issues, and the rights of EU citizens in the UK – but we feel confident that the UK will push for the best deal even if they have to pay more for this divorce settlement.’

The Latest from the Cable

Short-term price fluctuations with the cable are decidedly bearish as concerns over Brexit negotiation instability mount. Most everything that happens with the GBP/USD pair is related to ongoing Brexit negotiations. Traders are paying scant attention to UK manufacturing production data and industrial data. However, USD weakness in the form of mixed jobs data has helped to bolster GBP ahead of the Christmas holidays. It appears that traders are adopting a ‘sell the fact’ approach to sterling. Recently, Prime Minister May clenched a big deal with the EU when she managed to get a pathway to Brexit implemented. Details of the 15-page progress reports were released to the media, and these indicate that Britain will be paying between €40 billion and €60 billion in divorce settlement fees to the European Union. Additionally, the rights of European Union citizens residing in the UK will be protected as part of any ongoing, and future deals.

White Smoke Rises

In a symbolic gesture – Jean-Claude Juncker the EC president authorized the release of white smoke through the chimney stack to indicate that the Brexit deal is in the works. Now, the UK and the EU will be moving onto the next phase of Brexit negotiations. While this appears to have adversely affected the trading level of GBP/USD over the short-term, it will invariably bring greater stability to the currency. One thing that markets despise more than anything else (even a bad deal) is uncertainty. The UK has a much clearer mandate moving forward and this will help to build incremental strength for the currency. For GBP bears however, there wasn’t very much to reverse negative sentiment given that EU officials do not believe that trade talks can begin any time before March 2019. This held the GBP at weak levels against competing currencies.

How Is the USD Performing?

During the month of November, NFP data indicated a rise of 228,000, while unemployment remained steady at 4.1%. While the number of unemployed people in the US held at 6.6 million, the long-term unemployed figure remained unchanged at 1.6 million people. The LFPR (labor force participation rate) was unchanged at 62.7% with little fluctuation over the past year. The average hourly earnings for NFP data increase by $0.05 in November 2 $26.55. Hourly wages have also increased by a margin of 2.5%, or $0.64 in November 2017. These factors bode well for USD bulls, and work against the GBP to a degree. With the holiday shopping season in full effect, both the US and the UK economies can expect a bump in retail sales activity, leading to a neutralized effect on the currency. The New Year will likely see the GBP trading closer to the 1.34 handle as its support level.


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