GBP/USD Volatility Intensifies as COVID and Brexit Woes Mount

The GBP/USD is getting relatively volatile today as traders continue focusing on the new strain of the virus, strong UK economic numbers, and the blurry view on Brexit. The pair is trading at 1.1318, which is substantially higher than yesterday’s low of 1.3190.

Strong economic data

The UK economy rebounded in the third quarter as the country continued to reopen its economy following the first national lockdown.

According to the Office of National Statistics (ONS), the economy rose by 16.0% in the third quarter. That was better than the previous two revisions by the agency. It was also slightly better than the overall estimate by analysts polled by Reuters, who were expecting the economy to rise by 15.5%.

Still, the economy is substantially lower than where it was before the virus. On a year-on-year basis, the UK economy declined by 8.6% in the third quarter, a significant improvement from the Q2s decline of 21.5%. 

This improvement was mostly because of robust government spending, a smaller increase in business investments, and strong household spending. Indeed, business investments increased by 9.4% during the quarter. 

At the same time, high government spending pushed the country’s fiscal situation deep into the red zone. In total, the government borrowed more than £31.6 billion in November, £26 billion more than what it borrowed in November 2019. That monthly increase was the third-highest since the agency started to collect the data. 

As a result, total public debt stands at more than £2.1 billion, which is equivalent to 99.5% of the total GDP. 

Sadly, the situation will get worse since the government has pledged to continue with its furlough program until March next year. 

Double-dip recession likely

Meanwhile, while the economy made some improvement in Q3, there is a major concern that it will contract again in Q4. That’s because, in November, the government announced a major lockdown that affected England.

And this week, it announced another lockdown as the health officials identified another aggressive strain of the virus. The new strain spreads about 70% faster than the original one and is responsible for most of the new infections.  As a result, vaccine developers are conducting tests to ascertain whether their drugs can address this new mutation.

Subsequently, the UK got more isolated as Europe and other countries announced travel bans. So far, countries like Germany, France, Spain, and Italy have started barring movements to and from the country.

Worse, the new situation is happening at a time when the possibility of a Brexit deal is fading. With less than two weeks to go, the two sides are still feuding about fisheries, regulations, and governance of the deal. 

Still, some economists believe that the two sides will reach a deal because of the underlying stake. For one, the UK sells more than 45% of its overall goods to the European Union. Also, more companies have warned that they would leave the UK if it leaves without a deal. 

Some have already done that, with leading banks moving more than $1.2 trillion worth of assets to EU members. And in a report today, the FT said that the two sides were close to an agreement on fisheries.

GBP/USD technical outlook

The four-hour chart shows that the GBP/USD price has been on a strong uptrend. At the current price, it is between the ascending channel that’s shown in blue. It is also above the green support level and the 25 EMA. Further, the Average True Range (ATR) has continued to rise, which is a sign of high volatility. Therefore, we believe that the pair will continue rising as bulls aim for the upper side of the ascending channel at 1.3626.