Pound Turns Bullish As UK Inks Special Status Deal With EU

For most part of last week, GBPUSD traded between 1.4275 and 1.4332. However, the last trading day of the week saw the currency pair rising sharply to close at 1.4401. The uptrend was attributed to the landmark deal, which gave special status to Britain, thereby avoiding a potential split of the former from the European Union.

The special status allows Britain to enact special laws to safeguard the British businesses and offer welfare rights (& benefits) to migrant workers. More importantly, the deal ensures that Britain would not have any need to join the Euro zone but still remain a part of the reformed European Union.

Furthermore, the UK taxpayers will never have to bail out the Euro zone banks. Britain’s Prime Minister David Cameron claims that the deal ultimately protects the future of the Pound.

euronews

A referendum in which the residents of Britain are expected to vote for or against the ‘Brexit (Britain Exit)’ is be conducted before the end of 2017 (touted to be June 23rd). As Britain nears the time for the referendum, the volatility of the GBPUSD pair has started increasing. The reason is that a vote in favor or against staying with the European Union would create a lasting impact for both the Euro zone and the UK. The Britain currently has about 3 million Europeans, while there are 1.3 million British expats in the European mainland.

The trade relationship between the UK and the EU is not something which can be discarded so easily. The outcome of the referendum can put a serious question mark on the current employment scenario. About 45% of exports and 53% of Britain’s imports transact with Europe. The bilateral trade support 3.4 million jobs or 5.3% of the British population. Thus, it is important for Britain to stay with the EU at least as of now. Such is the importance of the EU meet that the Lithuanian president quickly tweeted a message as soon as a deal providing Britain with a seven year break was reached.

Agreement #UKinEU done. Drama over.

— Dalia Grybauskaitė (@Grybauskaite_LT) February 19, 2016

The deal is positive in the near-term for the British Pound and so we can expect an uptrend in the GBPUSD pair. The long-term impact depends on the result of the referendum.

On Friday, the market also saw a surprisingly positive UK retail sales data. Compared to December, the retail sales for January increased by 2.3%. The analysts’ expectation was a sequential increase of 0.8%. Considering all these factors, traders can expect the GBP to rise against the US dollar in the coming weeks.

Technically, as shown in the image below, the GBPUSD pair has a major support at 1.4307. Major resistance exists at 1.4782 levels. A long position can be initiated near 1.4380 levels with stop loss below 1.4275.

The target price for the long trade is 1.4740. The risk to reward ratio for the trade is 1:4. A UK forex trader can purchase a call option with March end expiry. The suggested strike price for the call option is 1.4500.

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