We have been pushing out increasingly bullish forecasts for the pound over the past few weeks and months, and it is all to do with the fact that a no-deal Brexit has been avoided.
A no-deal Brexit was undoubtedly a big risk for the UK economy as it would have raised prices of imported goods among other things, pushing the Covid-hit economy further into recession. But this is no longer the case and it is a big relief for investors – and the pound.
What’s more, the UK is also among the first countries to roll out the Covid vaccines, which should mean it may be among the first European countries to end the lockdowns. At the moment though, it is becoming increasingly difficult for some investors to remain hopeful and see the light at the end of the tunnel, as we are seeing record new COVID cases and deaths by each passing day. But when the lockdowns eventually do end, hopefully in the not-too-distant future, we could see the economy rebound sharply, providing sterling an additional boost.
Investors are thus continuing to see through the short-term risks that the latest lockdowns pose to the economy. They know full well that the UK is not alone in this and this is impacting most other European countries as well. This is why the EUR/GBP is not rallying.
As sterling’s bullish momentum gathers pace, it is worth keeping an eye on the EUR/GBP, which is in the process of forming a major head and shoulders reversal pattern:
Source: ThinkMarkets and TradingView.com
The EUR/GBP has already broken below the bullish trend line and the 200-day average at around 0.9000, and this has tipped the balance firmly in the bear’s favour. Consequently, I now expect the neckline at around 0.8865 to break down next, which should then pave the way for further momentum selling in the days and weeks ahead.
However, if rates were to go decisively back above the 0.90 handle, then that would be an indication that the potential reversal has failed to work, and that in turn could lead to a sharp squeeze higher.
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