UK Prime Minister Theresa May’s comments about how the UK will leave the EU were well-received by traders on Tuesday as she confirmed that Parliament will debate the final Brexit deal. As a result, the GBP/USD had its best day since 2008 as it surged from around 1.20 to 1.24 in a matter of hours. But the cable eased back somewhat sharply yesterday session despite news of stronger UK jobs and wages data and Tuesday’s stronger CPI print.
At first glance, the pound’s reaction suggests that Theresa May’s comments merely triggered a short-squeeze rally rather than cause a change in the trend. This argument makes more sense when you consider the fact US President-elect Donald Trump’s inauguration is on Friday and not many people will be willing to have any bold positions on the dollar ahead of it, especially bearish bets.
However, I do believe that the pound may have carved out a bottom for the time being and thus expect to see at least some sort of consolidation at these levels. I think most of the negative news may already be baked in the price. Also, with incoming UK data pointing to higher inflation and growth rates, the impact of the Brexit vote has so far been positive if anything. Market participants may therefore find it difficult to justify initiating new sell positions on the currency at these already-depressed levels. Consequently we may see the pound regain its poise.
In the slightly longer-term outlook, the cable may be able to climb back towards 1.30s again if it manages to break through the 1.2415 resistance level. Though a bit too early, the GBP/USD may have created a major double bottom reversal pattern around the psychologically-important 1.20 handle. The fact that price moved away from this level points to significant buying pressure. That being said, if we create a new low below 1.20 then this view is obviously no longer valid.
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