Through the first three weeks of the month, the British pound has been the strongest major currency, boosted by Monday’s breakthrough in the negotiations around a Brexit transition deal.
The agreement would allow a nearly two-year transition period (through the end of 2020), though the thorny issue of the border between Ireland and Northern Ireland remains to be ironed out. In any event, the tentative agreement reduces the risk of a “hard” Brexit and gives UK businesses some idea of how the future will look when planning investments.
Not surprisingly, sterling rocketed higher on the announcement, with GBP/USD briefly touching its highest level in over a month. Turning our attention to the chart, there’s reason to suggest that cable has resumed its one-year uptrend. Rates have broken through the bearish trend line off the January high and are currently rising within a tight bullish channel.
Source: Stockcharts.com, Faraday Research
In the short term, the pair will continue to trade on both Brexit headlines and monetary policy developments. Both the Federal Reserve and Bank of England meet later this week and while the likely interest-rate decisions are already known (hike and hold steady, respectively), the tone of the accompanying statements and the result of the vote in the BOE’s case will still drive trade in GBP/USD.
Technically speaking, the short-term bias in the pair continues to point higher as long as the bullish channel holds, with potential resistance levels around 1.4100 and 1.4300. If that channel breaks, a retracement back toward 1.3800 or 1.3700 becomes more likely.