Corporate deal may trigger sale of many British pounds
British Reckitt Benckiser that owns the world-famous condom producer Durex, acquires the US baby food producer Mead Johnson Nutrition (NYSE:MJN) for $17.9 bn inclusive of debts. Market participants believe to settle the deal Reckitt Benckiser will have to exchange the British pounds to the US dollars. Will GBP/USD edge lower?
With disregard of the Mead Johnson Nutrition debts, the deal will be little cheaper at $16.6bn. Reckitt Benckiser strives for diversifying its assets. Besides condom production in Durex, the company also producers the Strepsils, Nurofen medicines, Dosia and Vanish detergents and the whole host of other products. The additional long-term negative for the British currency is Brexit. The Eurozone officials said that UK in to pay out 57bn euros under various mutual programs and liabilities in case of Brexit. British officials said it is too early to talk about the precise sum but the country is going to fulfill its financial obligations at least up to year 2020. The process of Brexit will take 2 years and will be triggered with the article 50 of the Lisbon Treaty with EU. British prime-minister Theresa May is going to do that till the end of March. Another factor which may weigh on GBP/USD rate may be the strengthening of the US dollar amid expectations of positive results of Donald Trump’s meeting with Japanese prime-minister Shinzo Abe on Friday February 10. In its turn, positive economic data may hinder pound weakening. In December the negative trade balance improved and the industrial production rose more than anticipated. In annual terms the industrial production rose 4.3% which is the 7-year high. Next week the significant inflation data will come out on February 14. The tentative outlook is quite negative in our opinion.
On the daily timeframe GBP/USD: D1 has been moving sideways for 4 months. Early in February it reached its upper boundary but failed to surpass it and is correcting down. The further decline of pound against the US dollar is possible in case of weak economic data in Britain and higher Brexit risks as well as in case of positive data in US.
- The Parabolic indicator gives bearish signal.
- The Bollinger bands have lowered, which means lower volatility.
- The RSI is above 50, it has formed negative divergence.
- The MACD gives bearish signals.
The bearish momentum may develop in case GBP/USD falls below the last fractal low at 1.234. This level may serve the point of entry. The initial stop-loss may be placed above the Parabolic signal and the last fractal high at 1.273. Having opened the pending order we shall move the stop to the next fractal high following the Parabolic and Bollinger® signals. Thus, we are changing the probable profit/loss ratio to the breakeven point. The most risk-averse traders may switch to the 4-hour chart after the trade and place there a stop-loss moving it in the direction of the trade. If the price meets the stop-loss level at 1.273 without reaching the order at 1.234, we recommend cancelling the position: the market sustains internal changes which were not taken into account.
Summary of technical analysis:
Position: Sell
Sell stop: Below 1.234
Stop loss: Above 1.273