Pound Falls Below 1.30
After punching above 1.35 line less than two weeks ago, the British pound has retreated, and will likely greet Christmas in 1.29-territory. Last week was the pound’s worst performance since October 2016, with losses of 2.5 percent. What happened?
Prime Minister Johnson’s resounding election victory delighted the markets, as there were real concerns of a deadlock between the Conservatives and Labour, which would have resulted in political instability. There was some post-euphoria after the election, as Johnson will now be able to wrap up Brexit at the end of January. However, investors are concerned about what happens after that, as London and Brussels must hammer out a new free-trade deal, with plenty of bad blood between the sides.
Weak data is also weighing on the pound. Consumer spending was dismal in November, as retail sales declined by 0.6 percent, well below expectations. As well, the BoE held interest rates at 0.75%, but sent the markets a dovish message. The BoE warned that “if global growth fails to stabilize or Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected U.K. recovery.” This is a strong hint that the bank could lower rates early next year, which is bearish for the pound.
GBP/USD posted strong gains in the first half of December, since then, the pair has retraced in an almost identical fashion and has given up these hard-won gains. Currently, the pair is testing support at 1.2940, for the first time since early December. Below, we find support at the round number of 1.2900, which could be tested during the week. On the upside, 1.3000 has switched to a resistance role, followed by 1.3050.