There was mixed news from the UK economy this morning, which saw the pound initially extend its losses before rebounding slightly. The UK unemployment rate unexpectedly fell to its lowest level since 1974 at 3.8%, down from 3.9% previously, while the employment rate hit a fresh record at 76.1% in the three months to March and the number of vacancies continued to rise. Employment remains strong therefore despite ongoing Brexit uncertainty. However, wages moderated unexpectedly sharply with the Average Earnings Index easing to 3.2% compared to 3.5% last and 3.4% expected.
Brexit stalemate continues
Overall, though, as it has become the norm, there was little reaction to today’s UK data. Clearly the focus remains on Brexit. But with the prospects of a softer exit or no Brexit at all, we continue to believe that the pound will be able to climb in the coming weeks and months.
The government has been attempting to find a cross-party compromise after the Prime Minister Theresa May's Brexit deal was rejected three times by parliament. A large number of Labour MPS also want a second referendum on any cross-party Brexit deal, according to shadow Brexit secretary. But after more than a month of talks, no progress is in sight. The Labour party leader Jeremy Corbyn wants the UK to remain in a customs union with the EU. While this would mean no tariffs on goods transported between the UK and EU, the UK would be unable to negotiate its own trade deals on goods with countries outside of the EU. For some hard-core Brexiteer Tory MPs, this is a no-no as it would keep the UK tied to Brussels. In other words, the stalemate continues.
GBP/USD due for another short-squeeze rally?
From a technical point of view, the GBP/USD is once again finding itself bang in the middle of its 2019 range around 1.2950. There is no clear trend. But with the 200-day moving average flattening, this tells us objectively that the long-term trend is no longer bearish. Indeed, since hitting a low of 1.2442 in early January, the cable has been printing a few higher lows. However, because of ongoing Brexit uncertainty, the bulls have so far decided to stay largely on the side-lines. And with Brexit still hanging over the markets, the cable is unlikely to go anywhere far, fast. But within its wide ranges, it will create short-term trends that could lead to several hundred pips in either direction. With that in mind, and given the recent retracement back to within the middle of its range, the GBP/USD’s next short-term move could well be to the upside. So, we are on the lookout for a bullish pattern to emerge soon, ideally around these levels. It is interesting that since February, the bears have been unable to convincingly push the cable below the 200-day moving average. So, an idea we are entertaining is to look for another false break below the 200-day average and then a subsequent short squeeze rally. The GBP/USD is currently trading below this moving average at 1.2950. A close some distance back above this, ideally beyond the 1.30 handle, could pave the way for such a move to lift rates back towards the upper end of 2019 range. However, if the April low at 1.2865ish breaks decisively then all bullish bets are off.
Source: TradingView and FOREX.com
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