Sterling is on a Rampage as Greenback Retreats
GBP/USD has finally breached the critical 1.40 level. After slumbering since the fateful Brexit referendum on June 23, 2016, sterling has achieved a significant milestone against the greenback. The 52-week trading range of the currency pair is 1.2113 on the low end and 1.400 on the high-end. For the year to date, sterling has risen from 1.3512 by $0.0488 for a 3.61% appreciation. By contrast, the USD has fallen sharply. The US dollar index (DXY) is a broad measure of the greenback’s performance against a basket of 6 currencies. It is currently at 90.45 (January 22, 2018) fractionally above its 52-week low of 90.11. The year to date performance of the DXY is -1.82%, and the 1-year performance of the DXY is -9.48%. This validates what we are currently seeing with the GBP.
Over the past couple of days, sterling has faced selling pressure as speculators started taking profits. Every time GBP/USD appreciates sharply, it is met by short-term profit-taking, which results in the pair slipping. However, the trend is clearly bullish. Over the short-term, the 1.40 barrier may remain a resistance level, but GBP is likely to continue pushing through that psychological barrier. Part of the reason why sterling has risen sharply is dollar weakness.
It is uncanny that the USD is weakening as the Fed gears up to raise interest rates by another 25 basis points in the coming months. The US economy is on song, with stellar performances being recorded on the Dow Jones, NASDAQ, and S&P 500 index. The tax cuts will boost demand for USD as the country becomes a business-friendly haven for multinational corporations. However, short-term bears are grappling with the USD. Brexit-related issues remain a key consideration in exchange rates. If it appears that the UK will enjoy a soft Brexit landing, the GBP will strengthen. If a hard Brexit ensues, this could disrupt the GBPs march.
Could the UK Pay its Way to EU Access?
Several other political considerations are weighing on the performance of sterling, notably in-house fighting among the Brexit bloc and the Bremain block of government. There is talk of the UK having to pay £15 billion to the EU as a backdoor deal to access European markets. Instead of paying directly to Brussels, it could go towards science and other initiatives. This massive payment could seal the deal for the UK, but government ministers will have to give the green light.
In terms of economic indicators, there is little to speak of. The upcoming days are light on news, and there are low levels of volatility for currency pairs. GBP is riding the tailwind of the USDs weakness, and this short-term momentum will continue. Speculators will be heartened by the GBPs resilience to break through the psychological 1.40 barrier. The current support levels appear to be holding at the 1.3660 and 1.3720 levels for the short-term.
When Are Traders Most Likely to Generate Bigger Returns on the Cable?
Traders looking to capitalize on price fluctuations with the GBP/USD are advised to trade the currency pair between 6 AM and 4 PM Monday through Friday. These are the ideal times to generate profits and benefit from price movements. Day trading activity is maximized between 8 AM and 10 AM, and between 12 noon and 3 PM GMT. These periods of the day reflect the biggest price movements and generate the largest profits. It’s also during those hours that both London and New York are open for business and their times overlap.
Besides Central bank activity (rate hikes boost currencies and rate cuts weaken them), unemployment data, housing data, and performance criteria (better than forecast, or worse than forecast) will impact the strength of the currency in question. Major UK economic indicators such as GDP growth rate will be announced on Friday, 26 January, followed by the GfK consumer confidence index for January on Tuesday, 30 January. For the USD, major economic indicators include GDP growth rate on Friday, 26 January, personal income and personal spending on Monday, 29 January, and ADP employment change data for the month on Wednesday, 31 January.
What are your expectations regarding the strength or weakness of the GBP/USD pair in the coming week?
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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.