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Lee Hardman, Currency Analyst at MUFG, notes that the pound has been one the best performing currencies against the US dollar overnight as cable has broken tentatively above its 55-day moving average at just above the 1.2400-level for the first time in over a month.

Key Quotes

“It potentially opens the door to further upside in the near-term with the next key resistance at the 1.2500-level, and then beyond from the early December highs between the 1.2700 and 1.2800- levels. The pound is still deriving support from UK PM May’s key note speech last week which has helped to ease “hard” Brexit fears at least in the near-term. The additional certainty provided by PM May’s Brexit plan and positive message for a more global Britain have been welcomed by the market.”

“The market is also anticipating the verdict from the Supreme Court in the UK tomorrow which could offer some further modest support for the pound. The Supreme Court is expected to rule that parliament should have a say in triggering Article 50. The market would welcome greater parliamentary involvement in the process viewing it as reducing the risk of a more disorderly Brexit. The wording of the ruling with regards to parliamentary involvement will prove important. A defeat for the government could increase the risk that the triggering of Article 50 is a little delayed, although it will not stop Brexit. We expect a majority in parliament to honour the referendum result and vote in favour of triggering Article 50.”

“It has not all been good news for the pound in the near-term. The release on Friday of the latest UK retail sales report revealed a sharp contraction in December. The report has heightened concerns that higher inflation from the sharply weaker pound is starting to have a more negative impact on consumer spending. One caveat is that a correction was overdue after retail sales growth surged in the previous five months. The weakness in December likely exaggerates the underling health of the consumer.”

“The release of the flash estimate for UK GDP in Q4 will be released in the week ahead. It is expected to reveal that the UK economy has been little impacted so far by the Brexit vote. We remain on the more optimistic side expecting only a modest slowdown in growth in the year ahead which in part supports our view that the pound could outperform current pessimistic expectations.”

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