Despite the missed deadline for the Brexit agreement, the pound sterling is still growing. Isn't it a paradox? At first glance, it should have fallen hopelessly after November 15 – a date that London and Brussels had previously designated as critical. The issue of divorce must be resolved before the end of the year, and for this, the parliaments of Britain and the EU need to ratify the agreement. Which is still missing. What is it? Why is GBPUSD so confident to grow? The answer to this question should be sought from politicians.
Yes, the deadline has been missed, but negotiators have repeatedly done it so before. Nevertheless, negotiations are still ongoing. David Frost once again visited Brussels, and officials say that the EU summit, scheduled next week, is crucial. However, the main reason for the rise of sterling is the resignation of Dominic Cummings from his post of economic adviser to Boris Johnson. Investors interpreted this as a signal that London is ready to make concessions. And even if the Cabinet of Ministers called such conversations nonsense, there is no smoke without fire.
According to MUFG, the deal will still be concluded, but the GBPUSD pair will not be able to fly above 1.35-1.36, since this factor is already partially taken into account in its quotes. In my opinion, this year the pound may have a ceiling, but in 2021 its rally is likely to continue, which will be facilitated by the transfer of capital from the US to Britain. According to Citigroup forecasts, the yield on 10-year Treasury bonds on expectations of a victory over COVID-19 and a global economic recovery will soar to 1.25%. The US debt market rates are closely correlated with the differential between US and UK stocks, which allows the company to consider the latter undervalued and recommend buying them.
Trends in US bond yields and FTSE 100 and S&P 500 differentials:
There is a possibility that the process of capital transfer from the US to the UK has already begun: since the beginning of November, the S&P 500 has grown by 10%, and the FTSE 100 by 13%. At the same time, the US stock index has updated its historical maximum, while the British one remains 16% lower than at the end of 2019.
GDP dynamics:
The UK economy also echoes the shares. Despite its fastest growth since record-keeping began in 1955 (by 15.5% in the third quarter), GDP remains 9.7% smaller than at the end of last year. The recession was deeper than in the US and the Eurozone, while the introduction of repeated restrictions by London officials is fraught with a double downturn – the Bank of England predicts that the economy will contract by 2% in October-December. However, the sterling exchange rate is more influenced by politics and global risk appetite.
Technically, the GBPUSD pair clearly plays the Broadening Wedge pattern on the daily chart. The pair's correction to 1.312 allowed us to form long positions in accordance with the recommendations indicated in the previous article. Now it remains to hold longs and count on the conclusion of a Brexit agreement. The intermediate targets of the upward movement are 1.337 and 1.351, where important pivot levels are located.
GBPUSD daily chart:
