Pound to Strengthen on Talks of Transitional Brexit Deal

Pound to Strengthen on Talks of Transitional Brexit Deal

The overwhelmingly positive FOMC statement in December, indicating the probability of three rate hikes this year, triggered a rally in the US dollar, against its rivals. The opportunity was immediately used to hammer British Pound, which has been reeling under pressure due to the Brexit saga. From a high of 1.2722, the GBPUSD pair fell to a low of 1.21997 in two weeks that ended on December 29th. However, we anticipate the Pound to recover in the short-term, based on the arguments provided underneath.

The pressure on the Pound has considerably decreased in the last few days because of the proposed transitional agreement. If such an agreement gets through, then the UK will have unhindered access to the EU market until the Brexit related negotiations gets completed. It would take at least two years, if not longer, for the completion of negotiations. Even after completion, it may take a while for the implementation as new infrastructure, which includes appointment of civil servants and establishment of regulatory authorities, should be put in place for a smooth transition. So, as of now, the probability of a transition agreement would encourage speculators to wind down short position.

The Pound is also supported by the UK’s Q3 economic expansion of 0.6%, compared with 0.5% expected by analysts. The Q3 GDP growth rate was a pleasant surprise for the market, following the shocking outcome of the Brexit referendum.

Finally, January is expected to be dominated by swearing-in ceremony of Donald Trump. Thus, investors will remain cautious and avoid adding further long positions in the US dollar. From here on, the upward movement of the US dollar is largely dependent on the actions taken by Trump after assuming office. Thus, fundamentally, the GBPUSD pair is expected to rise further in the short-term.

The historic price chart indicates consolidation of the GBPUSD pair at 1.2200. The MACD is rising, while the stochastic oscillator is nearing the oversold region. Based on the indicators, we forecast the GBPUSD pair to begin an uptrend.

GBPUSD - Technical Analysis - 4th January 2016

A Forex trader can take a long position between 1.2230 and 1.2250, with a stop loss order below 1.2160. The long position can be closed near 1.2370.

Likewise, a binary trader can invest in a call option, which is otherwise referred to as the above or high contract, to benefit from the probable uptrend of the GBPUSD pair. The investment can be made when the pair trades below 1.2240. The trader should select an expiry period of one week for the contract.

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