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Pound Sterling Gains on Euro and Dollar, Leads Majors Higher into Year-end

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- GBP gains over all major rivals early in new week. 

- Could soon meet resistance from EUR and USD.

- But GBP charts also offer support over short-term.

- EU's opening gambit in trade talks a risk to GBP. 

The Pound advanced on the Euro, Dollar and all other major rivals in thin holiday trade Monday although the British currency could soon meet resistance from its U.S. and European rivals on the charts. 

Investors had been content to sell the Dollar and buy other currencies thus far in the holiday trade although that trend went partly into reverse on Monday, with the greenback recovering its poise against a range of major currencies although not Pound Sterling or the Euro.

Both of the latter have recovered strongly against the Dollar during the festive break after technical support levels on the charts helped arrest earlier losses, leaving the Dollar index down and Sterling up 0.08% over the Euro. 

Monday's headlines were dominated by reports of a U.S. missile strike on an Iranian-backed militant group in Iraq and Syria. Secretary of State Mike Pompeo told reporters further strikes could be warranted so it's possible Monday's risk-off price action in currency, stock and bond markets was prompted by the prospect for fresh tensions between the U.S. and Iran in the Gulf. 

None of this stopped the Pound from advancing on all of its major rivals early in the Monday session, making it the best performing major currency to start the week. Sterling was quoted 0.55% higher at 1.3122 against the Dollar and 0.16% higher at 1.1721 over the Euro.

"Minor resistance comes in around the May high at 1.3187 as well as at the January high at 1.3217 and more significant resistance at the 1.3351/82 February and March highs. Above the current December high at 1.3515 sits the December 2017 high at 1.3550," says Axel Rudolph, a technical analyst at Commerzbank in a pre-holiday briefing, of the Pound-Dollar rate. 

Above: Pound-to-Dollar rate shown at 4-hour intervals. 

"The clearing of the immediate uncertainty around the U.S.-China trade deal question has failed to see volatility ramping up significantly, though some of that may be down to the time of year," says John Hardy, chief FX strategist at Saxo Bank. "The sterling move in the wake of the UK election was halted near the 1.35 level in GBPUSD and since then, price action suggests it may take some time to digest this move."

Sterling steadied on Friday when European Commission chief Ursula Von der Leyen told the French and German press that an extension of the Brexit transition period is likely to be necessary, and agreement would be required around mid-year. If that's the EU's opening gambit in the negotiations over the furture relationship then markets might soon fret about a renewed prospect of a 'no deal' Brexit at the end of 2020. 

Prime Minister Boris Johnson has, after all, used the Withdrawal Agreeement Bill that's set to ratify his agreement with Brussels to render any extension of the transition unlawful. He could always repeal or amend that part of the bill but its late insertion suggests the government might want a 'no deal' Brexit cliff edge of a sort to use in the next stage of the negotiations.

"Of course, Brexit is not “done” as during the transition period the UK and the EU need to negotiate a new trading agreement," says Paul Dales, chief UK economist at Capital Economics. "Brexit uncertainty will continue to restrain GDP growth. That said, the economy will still probably improve in 2020 due to the effects of a fiscal stimulus. But that probably won’t be enough to warrant higher interest rates in 2020 or a pound higher than $1.35."

Above: Pound-to-Euro rate shown at daily intervals. 

The Pound-to-Euro rate has bounced off support on the charts in recent days and was still quoted above 1.17 Monday. There is firm technical support just above 1.16, around which the British currency spent much its time trading during the six weeks heading into the December election. 

Sterling has risen 9% against the Euro and 10.7% against the Dollar since early-to-mid October when Johnson first announced he’d agreed terms of the UK’s exit with the EU. And gains are even larger if measured from the lows struck in August when market fears of a ‘no deal’ Brexit under the newly-minted PM Johnson were at their fever pitch. However, the British currency will need to rise a further 1.5% agains the Canadian Dollar before midnight Tuesday if it's to reclaim its earlier position as the best performing major currency of 2019. 

"Resistance starts around 1.1850 then 1.1925 and 1.2000+ levels may well stay out of reach initially. Meanwhile support is thin beneath  1.1675 until 1.1600/1.1525 again," says Trevor Charsley at AFEX

 

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