GBP/USD – FINALLY SOME RESISTANCE?

Today I’m going to be speaking about the Pound and the huge influx of bullish momentum we’ve seen in the past weeks. I’m also going to dive a bit deeper into why we’ve seen such a strong bullish push across the board with the Pound. 

The first theme I’ll be covering is Brexit. The deal that contained the new rules as to how the EU and the UK will work and trade together was implemented on 1 January 2021. It must be said that Brexit is not completely over. There are still some important decisions to be made with regards to data sharing, financial services and the fishing industry. Not all of the EU’s rules and regulations have been applied yet, with a grace period running up until the 1st of April, with the possibility of an extension till 2023.

With that being said, it is partially because of Brexit that we have seen this bullish push in the Pound. Initially, Brexit caused a outperformance in UK assets, as the Pound was taking a beating due to the uncertainty Brexit brought to the Pound. However, this has now changed. 

With an agreement between the UK and EU being reached, majority of the uncertainty surrounding the Pound was cleared up. This resulting in huge optimism being seen in the price action and for the future of the Pound. 

Moving onto the main theme behind the Pound strength; vaccine roll-outs. A foreign exchange strategist at Goldman Sachs said that the UK is currently benefiting from a “first mover advantage” and I couldn’t agree more. The UK has been by far the most successful and efficient when it comes to vaccination roll outs, and because of the fear Covid19 and what it has instilled across the world, the UK being so far ahead and so efficient with the vaccinations, It can be seen as the catalyst for the buying pressure across the Pound.

The Wall Street Investment bank said earlier this week that the vaccine roll-out and the decrease in infections in the UK is putting them in a favourable position for a near–term rebound. 

On the 23rd of February, the UK also recorded its lowest daily infections for the year and 1 in 3 adults had received their first vaccinations.

Vaccinations Data

As seen above, the UK has 27.5% of its population vaccinated, far more than any other leading economy with the US sitting at 19.4% of their population vaccinated. 

Daily Hospital Admissions

Analysing the above chart we can also see how hospitalisations have decreased rapidly from the 1st of January as vaccination roll-out has been a massive success. 

Pound Demand Increasing

Above, we can see demand for the Pound has increased dramatically since the beginning of the year. This buying pressure is seen from large institutions and being front run by Real money. Real money include pension funds, insurance funds, real estate investment trusts, asset managers and other finance houses. This has been the strongest demand for the Pound seen in a decade. With these positions over extending, we can anticipate price to recede before continuations.

Correlating the recent fundamental themes to the GBP/USD chart, price is currently on a bull run, but reaching into some interesting areas, a possible pull-back on the cards? 

MONTHLY TIMEFRAME

Looking at the Monthly timeframe on GBP/USD we can see price is approaching our weekly key level of 1.42500. This is quite an important area to start looking for reversals, however, my favoured outlook is that the Pound continues to push higher into the order block I’ve highlighted in red, in line with the highs we saw in April 2018 in and around the area of 1.44000-1.45000. 

WEEKLY TIMEFRAME

Dropping down to a weekly timeframe, I’ve highlighted where we reached a Brexit agreement for the first time as well as when the new rules regarding Brexit were implemented and the effect it had on the market thereafter.

We can see the initial optimism of reaching an agreement drove price nicely, with a weekly closure above the level of 1.35000. The rules were implemented on the 1st of January 2021 and we can see it lead to a pull-back into the important level of 1.35000 before a huge bullish continuation. 

4 HOUR TIMEFRAME

Looking at the 4 hour timeframe, this is where I am starting to see room for a possible pullback. As it stands, GBP/USD has not yet tapped the level of 1.42500 just yet, but has started a slight bearish decline. We have a ascending trendline that I’m looking to be met for the 3rd bounce around the area of 1.40000 – 1.39750. This lines up beautifully with our 50 day EMA and our preferred Fibonacci levels of 61.8-78.6%. With this being said, there is a minor level of support around 1.41000 that would need to be cleared before we see the level of 1.40000. All previously mentioned confluences lead me to believe the Pound has the potential to pull back before more bullish continuations. The fact that we should start seeing restrictions being eased in the UK as early as June 2021 also acts as an extra confluence for upside in the Pound.

24 February Fundamental Event

Fundamentally for the week ahead there isn’t much to look out for when it comes to the Pound besides the monetary policy report hearing that is coming out later today at 4:30pm. The grace extension till 2023 is also being discussed this evening.

As always, I encourage all traders to exercise risk management when entering positions and I hope you all have a successful week in the markets!

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