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Friday, February 26, 2021

GBP/USD path to 1.2600 remains as key UK risks remain

  • The GBP/USD rose today mostly because of a weaker US dollar.
  • The UK is facing significant risks such as that of a no-deal Brexit.
  • The unemployment rate is expected to rise as the furlough scheme ends.

The GBP/USD pair is up by more than 0.65% as traders reflect on the ongoing tussles on Brexit. They are also waiting for the upcoming Federal Reserve and the Bank of England (BOE) interest rate decisions. The pair is also falling because of the overall weaker dollar.

GBP/USD rise ahead of BOE decision

Brexit fears remain

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Last week, the eighth round of Brexit talks ended without signs of a deal. In a statement after the meeting, David Frost said that the UK was opposed to some key issues suggested by the EU. The UK wants to leave with a free trade agreement (FTA) while also not following EU laws. In other words, it wants a deal similar to the one the EU has with other countries like Canada and Australia.

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In a separate statement, Michel Barnier, the chief EU negotiator, accused the UK of seeking an unfair advantage against EU firms. He argued that companies in the UK would have an added advantage against their EU counterparts. Also, he argued that having a Canadian-style agreement would be impossible because of the close proximity to the EU.

All this happened as Boris Johnson unveiled an Internal Markets Bill that would break an international law he signed in October last year. The EU has threatened to sue the UK. And US democrats have threatened not to pass a US-UK agreement if the bill becomes law. Therefore, while parliament is likely to pass this bill, there is a likelihood that it will not pass in future stages.

The risk for the UK and the GBP/USD is that the country is mostly dependent on European Union. That is because it sells more than 45% of its goods there while the EU sells only 5% of its goods to the UK.

Another risk for the UK

Meanwhile, the Office of National Statistics (ONS) will release the official employment data tomorrow. Analysts polled by Reuters expect the data to show that the unemployment rate rose to 4.1% in July. They also expect the data to show that more people filed for jobless insurance in August.

Still, the biggest risk for the UK is that the unemployment rate is expected to rise in the coming month when the government ends its furlough scheme. This is a scheme where the government has been paying salaries to most workers. The scheme has helped support the UK economy and keep the unemployment rate low.

According to The Institute of Employment Studies, more than 700,000 people could lose their jobs once the scheme ends. If that happens, it will be the biggest pace of redundancies in the country since the 1970s.

It is against this backdrop that the Bank of England (BOE) will conduct its meeting on Wednesday. Analysts polled by Bloomberg expect that the bank will leave rates unchanged and possibly signal a rate cut later this year or early next year. The report said:

“There’s still room for the markets to price the outcome of BOE having to cut to zero if Covid-19 worsens and no-deal seems more likely by the November meeting. The negative rate debate may intensify next year.”

GBP/USD technical outlook

GBP/USD technical outlook

The GBP/USD pair had a relief rally today as the price reached an intraday high of 1.2885. On the daily chart, the price has formed a morning star pattern, which is usually a bullish sign. The price is also above the ascending purple trendline and below the 50-day and 100-day exponential moving averages. The Relative Strength Index (RSI) has moved from the overbought level of 80 to 40. I suspect that, even with the morning star pattern, the pair will continue falling as bears target the next support at 1.2600.

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