Over the past week, the British pound has also continued to rise in value in pair with the US currency and this is the most surprising event (from our point of view). We believe that the only reason that can explain it is the technical need for correction. Although the current movement can not be called a correction in the literal sense of the word, nevertheless, technical factors can be named as the reason. The fact is that no important news or reports are coming from the UK at the moment. Not to mention positive messages and strong statistics. Thus, traders simply cannot buy British currency based on the fundamental background of the UK. Thus, the fundamental reasons can only be hidden in the United States. On the one hand, it would seem that the answer to the question is obvious and lies on the surface – rallies and protests have been raging in America for two weeks in a row. Despite the fact that it was initially stated that police stations were burned, pogroms, and looting, in most cases these are really completely peaceful rallies. However, the reaction of traders to them could be exactly this – the sale of the dollar. However, in the article on the euro/dollar, we have already asked a reasonable question: why is the Swiss franc almost not getting more expensive when paired with the dollar, and the yen is getting cheaper at all? There may be two answers. Either market participants use only the euro and pound as assets after exiting dollar positions or the “foundation” has nothing to do with it at all. If the first option, then the question arises, why again the pound? If there are a much more stable Japanese yen and Swiss franc, which are often used for protection? Thus, we believe that the basis for the growth of the British pound is a little bit of everything. And if so, this process can end at any time, unless really important and serious information is received from the US, which will force traders to go to new sales of the US currency.
And potentially such information could have already been made available to traders last week. The fact is that the Chinese authorities have instructed Chinese companies to stop purchasing certain categories of agricultural products in America. Immediately after that, China also received reports that companies still continue to purchase American products, but no one can say for sure whether China continues to adhere to the agreements reached and signed on January 15, 2020? If official Beijing has given such an instruction, it has already questioned the implementation of agreements with Donald Trump. Given the fact that we have previously written about China’s desire to terminate the first phase of the trade agreement due to the “coronavirus” pandemic and the global crisis, it all looks true. And if so, this is a new blow to America and personally to Donald Trump. The fact is that a country like America will certainly withstand such a blow from Beijing as a refusal or reduction in the volume of purchases of agricultural products. Of course, American farmers will not have a sweet time, they will have to provide support, but still, the world’s largest economy will withstand such a blow. The termination of the trade deal now will be another blow to the American economy, which, unlike the Chinese one, will lose up to 10% in 2020 and it will further hit Trump’s political ratings, which have already suffered so much in recent weeks. Thus, we are talking about the fact that China is seeking to strengthen its role in the international arena, as well as “finishing” Donald Trump personally, so that he will not be re-elected in November 2020 in any case. After all, if you look at the situation as if from the outside, it was China that dealt America the strongest blow with the “coronavirus”. It is clear that the whole world suffered, but America also suffered, which, in principle, was what Beijing needed (we do not say that the spread of the virus was intentional).
It should also be noted that it is American farmers and private households, which depend very much on agricultural exports, and are the main electorate of Donald Trump. If China stops purchasing these products or reduces the volume, it will cause great frustration among farmers, who may refuse to choose Trump as the next president of the country. In addition, the country has been in a trade war with China for two years, and the shaky truce that was reached in January may collapse in June. And if it collapses, then it turns out that the American government has not made any progress in the confrontation with China, which has been trumpeted for a long time. There is no result, except that both sides will again impose duties and sanctions on each other, from which in most cases ordinary citizens will suffer. And on this issue, it should also be noted that American businesses are also suffering from a trade war with China. And if business suffers, it means that it will support someone who can improve relations with China, that is, Joe Biden.
Thus, all this means only one thing. Any attempts by Trump to impose sanctions against China, Chinese companies, Chinese officials will somehow be followed by a response. At the same time, it is completely unclear when and in what form it will follow. But Beijing will definitely not remain in debt. It may seem that Beijing is taking a weaker position in the confrontation with Washington. However, it is not. Beijing simply makes much less official statements, in other words, Beijing shouts and threatens much less. However, it also has plenty of tools to put pressure on the US. Thus, there is no doubt that any attempts by the White House to expel Chinese companies from American stock exchanges, to impose sanctions against Hong Kong, against Beijing, and against financial corporations will definitely provoke retaliatory measures. This means that both the world’s largest economies, as well as the entire world economy, will continue to suffer from the confrontation of two giants who cannot agree between themselves. At least as long as Donald Trump is President of the United States.
In our view, the British pound may continue to strengthen if a new escalation of the conflict between China and the United States occurs in the near future. However, if this does not happen, the pound will likely start a new decline. As before, we do not recommend trying to guess the pair’s turn down, but rather follow the trend. Moreover, both trading systems that we regularly review the pair for are trend-oriented (“Ichimoku” and “linear regression channels”).
On the 24-hour timeframe, the pound/dollar pair started a new upward trend. Thus, it is now recommended to consider long positions with the goals of resistance levels 1.2865 and 1.3129. It is recommended to keep the longs open until the pair begins to show signs of a downward turn, which is best tracked on a 4-hour timeframe.