GBPUSD Trade Idea (Sept, 2020) Bulls Ready?
The past few months for the UK has had its ups and downs considering all of the noise of the markets and uncertainty still creeping around. One of the interesting statistics which isn’t covered much in the media though is the UK economy has been expanding in the past 3 months with a 6.6% growth in July. The eat out to help out scheme in the UK provided restaurants the privilege of offering 50% discounts between Monday and Wednesday during August, in July alone there was a 140% increase in activity so the scheme has helped wonders in the hospitality sector.
On top of this good news the UK has also secured a major trade deal with Japan. This aims to boost trade between countries by about £15bn. The main point being that there will be a tariff-free agreement on 99% of exports to Japan. At least there are some positive signs for the UK moving into 2021, but dare I speak too soon.
Forex Macro Currency Strength Meter - Logikfx
When analysing the economies across the world something that’s been a main interest is that the both the GBP and USD seem to be weakening on the currency strength meter. However, GBP take the lead with a positive score of +10 whereas USD has fallen flat to zero. If this trend continues we may see that the GBP will be stronger in relation to the USD overall, especially if new economic data comes out bullish for GBP. Right now we’re more bullish on GBP than USD on the domestic level, by the end of the month we’ll have a good idea if this trend will continue or not.
What we’re going to do now is get a gauge on what’s happening on a relative basis between the UK and U.S. by analysing a few main factors.
Gross Domestic Product GDP Differentials
This might be something new for all our regular readers but here at Logikfx we’ve now developed a new indicator for our traders. What it does is analyse the GDP growth of each economy and allows you to compare them between each other to get a future forecast of growth or contraction. This is a revolutionary step for our traders in gaining an edge in the market with nowhere else having anything close to this at such an efficient level!
Below you can see I’ve compared the base currency GBP against the counter currency USD to get a differential of their GDP growth rate and whether they’re slowing or growing.
In this case in 2021 it’s forecast that the U.S. will grow slightly more than the UK which creates a slightly small negative change in differential of -0.1% equating to a small negative score of -2. Our currency strength meter is giving early signs of a long but currently the GDP differentials aren’t in great confidence. It will be interesting what the IMF predicts will happen in the coming months.
Gold vs GBPUSD
Gold is still major export and import in the UK and the U.S. so we’ve included it within the analysis between the two countries. Generally we expect a positive correlation with GBPUSD and gold due to the negative correlation gold has with the USD. We found that over the past 10 years there was a 5% positive correlation so not super strong. However recent data has only shown a small dip in gold price since last month of -0.44% resulting in a neutral outlook on gold and not contributing towards our short idea.
Our goal with this is over the next few weeks to keep track of gold prices and its relationship with GBPUSD. We’re heading into a potential second wave here in the UK which could allow gold prices to rise even further resulting in a greater long bias for our GBPUSD idea.
Ford Motors vs GBPUSD
Interestingly enough the UK’s biggest export is cars with the U.S. also being a major exporter and importer of cars. Ford Motors is a popular vehicle here in the UK being a major trade partner with the U.S. it’s important to include a handful of car companies in the analysis all which will show similar themes. Ford Motors has had very strong leading signals on price with GBPUSD, a positive correlation of over 67% since 2010. Right now we seem to have bottomed out on GBPUSD but potentially on Ford motors too with the price rising for 6 consecutive months now. This is a bullish signal on the motor company which lines up nicely with our long idea on GBPUSD.
If data continues to be bullish for Ford we’ll continue to have a stronger conviction on longing GBPUSD over the next few weeks. If not we may need to reconsider the trade.
WTI vs GBPUSD
Crude oil is again a popular export for both the U.S. and the UK. There’s no surprise then that we found a 77% positive correlation over the past 10 years with WTI and GBPUSD. What’s not so great is the fact that over the past month Oil prices have started to take another down turn, most likely due to further uncertainty around the pandemic. Prices dropped over 12% for oil with GBPUSD also following suit. This is actually a fairly strong bearish signal and goes against our idea to long GBPUSD.
Therefore, in the following weeks now we really need to keep an eye on oil prices to see if they recover. If they do we’re in the good zone to be bullish GBPUSD if not we need to keep it on the watch list and monitor if it’s getting better or worse.
Interest Rate Differentials
The interest rate differentials all seem to be looking very similar. You can see since 2015 the differentials were falling along with GBPUSD. However, since August 2019 we started seeing it rise. This then started to show in the GBPUSD exchange rate as price started to bottom out at similar levels. Now price has hit a range but differentials continue to rise. This is a bullish sign as if the interest rate differential becomes in favour of the UK we may see GBPUSD exchange rate start to appreciate in the future too. Right now signs seem okay as they’re not contradicting our idea.
FTSE100 Stock Market Index Analysis
Global stock markets all took a huge hit during the pandemic and that’s no different here in the UK. You can see since 2019 that the FTSE100 priced in USD has just been falling and since it’s recent high it’s dropped just under 3%. However, you can see over the past 6 months the FTSE100 in USD has been recovering which is fairly bullish on our idea and it shows that the UK pensions are becoming worth more once again. On a month to month basis though since there was a -2.67% drop if this continues it will be a bearish sign.
Therefore, overall for the FTSE100 (USD) we’re keeping an eye on it to make sure that the up trend continues which will allow us to be more bullish on the GBPUSD exchange rate with greater confidence.
Commitment of Traders Analysis (COT REPORT)
There are a couple signs we’re interested in when analysing the COT indicator. One of them is making sure that we’re following the pink line and the next one is since we’re bullish on GBPUSD we want that pink line to be above 0 because that would mean hedge funds are longing GBP. Therefore, currently we’re in a great area of sentiment with hedge funds buying the GBP over the past month.
On the flip side we’d expect the opposite for hedge funds and currently they’re also buying the USD. But only for the past 2 weeks and they’ve reduced their long positions slightly. This could indicate a potential upside move coming in the future but to be 100% certain we’ll need to monitor the weekly release on the indicator and expect the hedge fund line to go below zero, this would mean they’re selling the USD.
GBPUSD Price Outlook
Just glancing over the weekly levels we can see that the GBPUSD exchange rate seems to be bottoming out at around 1.2. This seems to be a major area of support where price has tried to go further down but gets rejected and buyers proper the price back up. Since we have a long bias on GBPUSD we can see the past 6 months since COVID-19 we’ve actually been on a bullish run with the exchange rate now at pre-covid levels. This is a good sign as it shows buyers are willing to get in especially at these all time lows.
On the daily time frame I’ve highlighted a potential level of support that could hold, however we’d need to monitor prices to see if it does. Currently we’re seeing some candle formations like morning stars but is that enough? Ideally, I’d like to see a few days of consolidation with bullish signals in between. This gives us time to monitor the indicators I mentioned above that aren’t ready just yet.
Overall, price is in an okay spot but we need to wait for a stronger fundamental conviction.
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