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Forex Market: GBP/USD hits fresh three-week highs as UK’s Sunak announces mini-Budget, Brexit risks limit upside

GBP/USD extended gains from the previous trading day on Thursday and managed to break above the 1.2600 mark hours after the announcement of UK Chancellor of the Exchequer Rishi Sunak’s economic plan to support recovery. However, developments surrounding Brexit were still restraining the Pound’s appreciation.

Britain’s Finance Minister announced additional GBP 30 billion in support of the virus-ravaged economy and promised bonuses to get furloughed employees back to work. Sunak also announced a GBP 2 billion “kickstart scheme” to create more jobs for people aged between 16 and 24. Additionally, the property tax on the first GBP 500,000 of all property sales was temporarily scrapped.

Yet, investors’ reaction to the announcement came a bit later, as GBP/USD successfully overcame the 1.2600 barrier in mid-Asian trade on Thursday. A broadly weaker US Dollar additionally contributed to the Sterling’s advance.

“There has been a little bit of a delayed response, I think, to the fiscal story here in the UK,” Stephen Gallo, European head of the FX strategy at BMO Financial Group, said.

“If it weren’t for the Brexit factor, which is holding down the pound, I think the pound would be significantly higher now because the UK has a much more dynamic fiscal story than the euro zone as a whole,” Gallo added.

A new round of Brexit negotiations began on July 7th. In a telephone conversation that same day British PM Boris Johnson told German Chancellor Angela Merkel that his country was ready to part ways with the EU on the same terms that Australia has with the bloc, in case a future trade deal is not agreed on.

EU-Australia trade relations are, to a great extent, based on default World Trade Organisation rules. Yet, there are specific arrangements for particular goods.

As of 11:41 GMT on Thursday GBP/USD was edging up 0.29% to trade at 1.2646, after earlier touching an intraday high of 1.2667, its strongest level since June 16th (1.2688).

On today’s economic calendar, at 12:30 GMT the US Labor Department will release its weekly report on jobless claims. The number of people in the country, who filed for unemployment assistance for the first time during the business week ended July 3rd, probably eased to 1,375,000, according to market expectations, from 1,427,000 in the preceding week. Still, however, the latter exceeded the peak observed during the 2007-2009 financial crisis more than twice.

Bond Yield Spread

The spread between 2-year US and 2-year UK bond yields, which reflects the flow of funds in a short term, equaled 25.6 basis points (0.256%) as of 10:15 GMT on Thursday, up from 24.1 basis points on July 8th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 1.2581
R1 – 1.2653
R2 – 1.2695
R3 – 1.2767
R4 – 1.2839

S1 – 1.2538
S2 – 1.2466
S3 – 1.2423
S4 – 1.2380

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