Brexit Uncertainty Keeps the Pound Bearish

Brexit Uncertainty Keeps the Pound Bearish
July 3, 2018

 

The Bank of England’s concern about household debt, and investors doubt about the smooth progress of Brexit, had kept the Pound on a declining trend until Friday morning. Later that day, the release of better than anticipated GDP growth rate of 0.2%, and narrower than anticipated current account deficit of £17.70 billion, enabled the Pound to regain a portion of the lost ground against its arch rivals – the euro and the greenback. The Pound’s decline against the Canadian dollar was also halted, but not reversed. We expect the GBPCAD pair, which is trading at 1.7350, to resume downtrend in the days ahead due to reasons given below.

Canada’s economy threw a surprise by expanding 0.1% m-o-m in April, despite bad weather conditions. According to Statistics Canada, 12 of 20 industrial sectors showed an improvement. Notably, the economy has been expanding through 2018, except January. In March and February, the economy grew by 0.3% and 0.4%, respectively. During April, the output of goods producing industries increased 0.2% as robust manufacturing and utilities sector outgrew the decline in oil and gas, and construction, mining, and quarrying sectors. Manufacturing output surprised with a growth of 0.8%. Both durable and non-durable goods production recorded solid growth. On an annualised basis, the economy is on track to achieve a growth rate of more than 2% in the second-quarter, increasing the hopes of a rate hike by the Bank of Canada in the July 2018. The markets are expecting the interest rates to increase by 25 basis points to 1.5%. If BoC goes ahead with the rate hike, then it would be the fourth one in 12 months.

Notably, Stephen Poloz, Bank of Canada governor has stated last week that Bank of Canada will not decide the course of its monetary policy based on speculation or rumours. Poloz made the statement when questioned whether a trade war with the US will discourage the bank from raising interest rates. While the Canadian economy is strengthening, the UK economy is shaken by uncertainty over Brexit issue.

During last week’s meeting on tackling immigration concerns, EU officials warned British Prime Minister Theresa May that time to secure a Brexit deal is elapsing. EU negotiators have given up hope of signing a Brexit deal with the UK at European Council summit to be conducted in October. The negotiators have cautioned that even if a deal is signed in December, it would be difficult to get it ratified before March. Therefore, we are expecting the GBPCAD pair to remain bearish in the short-term.

The GBPCAD pair is trading below its 50-day moving average. Furthermore, the currency pair is moving along the descending trend line. The MACD histogram is also moving deeper into the negative territory. Therefore, we do not anticipate any reversal at this point in time. The currency cross is expected get support only at 1.7140.

GBPCAD - Technical Analysis - 3rd July 2018

In the Forex market, we may go short in the GBPCAD pair near 1.7350, with an aim to book profit near 1.7150. To minimise risk, we will place a stop loss order above 1.7460.

Likewise, in the binary market, we may purchase a put option contract when the currency pair is trading near 1.7350. We will also choose a date around July 11 for the expiry of the contract.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.

Sammy

Sammy

Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world


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