12.02.202113:03 Forex Analysis & Reviews: Sterling remains afloat amid a troubled UK economy

In the previous two articles, we looked at the impact on the UK economy through retail damage from the coronavirus pandemic and the implications of the Brexit process. This time, this article is about GDP for 2020 and its historical levels.

According to recent data, the UK economy grew twice as fast as expected in the fourth quarter, but 2020 still ended in the worst recession since 1709 based on data from the Bank of England.

The gross domestic product grew 1% QoQ, driven by a boom in construction and government spending. This averted the risk of a second recession earlier this year but still left a trail for 2020 with a 9.9% contraction in the economy, which is considered the biggest recession in several hundred years.

The Bank of England believes economic growth will pick up as Prime Minister Boris Johnson's vaccination strategy gains momentum. Central Bank chief economist Andy Haldane expects consumers to release the roughly £250 billion in savings that households accumulated while the economy was locked in.

Chancellor Rishi Sunak said the economy has shown resilience over the winter, but insisted that it would be wise to proceed with caution to end the lockdowns. Sunak added that the government will determine possible support to be taken into account in the budget from March 3.

Britain's GDP in the fourth quarter was 7.8% lower than a year earlier, even lower than pre-pandemic levels of any other economic group in seven countries. The outlook for economic recovery is highly dependent on the extent of the damage left by the coronavirus pandemic. Few expect GDP to return to its pre-crisis path anytime soon, and the UK is expected to live with higher unemployment and government borrowing for many more years.

According to Financial Lives, the UK's flagship national consumer survey, a quarter of British adults expect it to be difficult to make ends meet as the pandemic continues to wreck the economy. One in three British adults, roughly 15.9 million, said back in October that family income would fall over the next six months.

The pessimistic attitude of the British, the damage to the economy caused by the coronavirus, and the exit from the EU - will all affect the pound sterling in the medium-long term.

Now, when we analyze the GBP/USD trading chart, we see an incomparable to common sense medium-term upward trend with a scale of almost 2500 points. The overbought rate of the sterling is at such a high level that it is simply impossible not to notice it. The value growth is largely due to speculative excitement in the market, which will end sooner or later, and that volume from long positions will be replaced by sales, which can lead to strong price changes.

It is too early to talk about whether there will be a change in the current trend, although fundamental factors indicate this. From a technical analysis point of view, we proceed from the possible formation of a full-size correction, which has not been on the market for more than four months.

Analyzing the current trading chart, you can see that the pullback from the local maximum of the trend of 1.3865 gradually directs the quotes to the previously passed area of 1.3750, which has played the role of resistance for a long time. In this plot, we have only imaginary signs of a possible correction, since the quote is still at the conditional peak of the medium-term trend.

The first signal of a change in trading interests may occur after the price has held below 1.3750 in a four-hour period, the second signal will come after the 1.3650 mark is passed in a four-hour period. In this case, we will get a sufficient increase in the volume of short positions and a depreciation of the pound sterling in the direction of 1.3500 - 1.3450 --- 1.3300.

At the same time, knowing that speculators are operating in the market, which accelerates the rate of the pound sterling, it is worth developing a scenario of a price rebound from the area of 1.3750, with an update of the local maximum. This scenario may lead us to the psychological level of 1.4000, but this will only delay the outcome of a large correction.

Indicator analysis

Analyzing different sectors of timeframes (TF), we see that the indicators of technical instruments on the minute and hour periods signal a sell due to the primary pullback in the market from the trend high. The daily period follows the medium-term trend trajectory unwaveringly, signaling a buy

Weekly volatility / Volatility measurement: Month; Quarter; Year

The volatility measurement reflects the average daily fluctuations, calculated per Month / Quarter / Year.

(February 12 was built taking into account the time of publication of the article)

The market dynamics are very low, which is not typical for such a volatile GBP/USD currency pair. The opinion that there is an accumulation of trading volumes at this time is still maintained

Key levels

Resistance zones: 1.3865; 1.4000 ***; 1.4350 **.

Support Zones: 1.3750 **; 1.3650 **; 1.3300; 1.3000 ***; 1.2840 / 1.2860 / 1.2885; 1.2770 **.

* Periodic level

** Range level

*** Psychological level