The pound has had a good start to 2020 as it seems poised for further gains, particularly against the euro. This is despite a drop over the Christmas period, and at the time of writing, it is at 1.1794. It did reach 1.20 ahead of Boris Johnson’s large majority in the December election, and grew a whopping 5% in 2019. Over the next month, we could see the pound react more to the publication of economic data, as well as reactions to Brexit developments.
Sterling Moves With the Trend
Sterling appears to have won back some of the gains made over the last 6 weeks or so, but if we look at trends since August, it is quite clearly upward. Lately, the British pound has begun to drift away from that trend, but we could see it return to the 1.20 mark.
Analysts feared that the British pound could have been overbought ahead of December’s General Election, which was indicated by the Relative Strength Index (RSI) reading over 70. The RSI informs traders of the trend being experienced by an exchange rate, as well as usefully hinting when movement is becoming extreme. The readings go from 0 to 100, and 70 or more indicates that a currency is overvalued or overbought, and there could be a reversal as a result.
This pullback has already happened, with the RSI for the British pound now at 55.62. The pound’s momentum is still positive and upward, but not as overbought as it was in December.
The pound gained around 5% against the euro last year. Investors believed that a strong Conservative majority would result in economic and political certainty for the medium to long-term. There were several points over the General Election campaign in November, where investors feared Jeremy Corbyn’s Labour Party might win a majority, or form a government in a hung parliament. With Labour’s seemingly anti-business policies and potential nationalisation of transport, the internet and more, the pound reacted badly.
Analysts are watching Boris Johnson with great interest. There is a chance sterling could rise this year and recover. However, this is a cautious outlook. The Prime Minister seems to have a clear plan for Brexit, and has pledged the UK will fully leave the EU at the end of this year. Yet, he made the similar pledge the UK would enter into a transition period with the EU last October, which didn’t happen, so we will have to wait and see.
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