The pound has had quite a few rough years. As many now hope for a smooth Brexit, there are also hopes that the GBP will be more stable and less volatile. Many analysts and economists believe that the UK economy, and other fundamental factors such as the interest rate differentials, will be the key driving force behind the sterling, and not the Brexit, as it has been the case since 2016.
Fundamental analysis: Back to the basics
Once the Brexit is out of the way, the bulls and bears should be back to the normal playground. In the four years, the pound has made moves mostly based on the Brexit news and speculations. Judging by the most recent price action, it seems that the investors are tired of Brexit and the circus around it, as they look forward to going back towards a more conventional way of conducting business.
“Article 50 negotiations started, at the time we were quite bearish on the pound because we thought that this uncertainty has to be bad for the currency still, and the market just ignored it for the best part of a year, if not slightly longer,”HSBC Senior FX Strategist Dominic Bunning told CNBC.
Thus, many expect that the GBP will start reacting more to data and the UK economy indicators, as well as the Bank of England’s (BoE) guidance, and less to political developments. The UK is scheduled to leave the EU at the end of this month, and talks over a future zero-tariff trade deal have already started.
Hence, the spotlight is likely to move more towards BoE Governor Carney and his crew. The most recent data shows a rebound in new orders, which is always a positive sign for the nation’s economy.
“The removal of near-term hard Brexit risks, the widely expected fiscal expansion, U.S.-China trade tensions lower and a global recovery in economic data suggest the Bank of England will stay on hold,”said Nomura FX Strategist Jordan Rochester.
According to the Japanese banking giant Nomura, the GBP could reach levels around $1.36 over the course of this year.
A recent survey of over 60 FX strategists, conducted by Reuters, reflects the belief among analysts that the pound will trade around $1.32 by end of this month, and will have risen to $1.35 by the end of 2020.
Technical analysis: Door open for a move to $1.35
Technically speaking, the pound is well-positioned for a potential drift higher against the USD. Following the results of the December elections, the sterling printed a 7-month high of $1.3515, before it retreated all the way to the $1.29 mark. However, the bulls managed to push the price back above the $1.30 handle, which is very important given that this is a key technical level.
As seen in the weekly chart above, the support created in the low $1.30s is holding the ground now and may be used as a base for a drift higher. The zone around the $1.35 mark offers a major resistance to GBP bulls, should you decide to buy the pound.
The pound looks well-positioned to move higher in the coming months. Unlike in the previous four years, the Brexit should have a diminished role to play in the market-related developments. Other fundamental factors, such as the interest rate differentials, will be the key driving force behind the sterling as the bulls target $1.35.