COVID-19 Mutation, Pound Slumping Ahead of Christmas

Shutdowns Spread Across Europe

The Pound collapsed more than 2% at the beginning of the week, following reports that a new strain of the coronavirus has hit the United Kingdom, and that Prime Minister Boris Johnson stiffened local restrictions. Brexit talks also fell short as negotiators failed to reach an agreement on the trade deal before Sunday’s deadline.

On December 20, the UK reached a record 35,928 new coronavirus cases, and this recent surge is thought to be triggered by a new mutation of the virus. Several ministers have indicated that restrictions could remain in place until Easter and until at least 20 million people have been vaccinated. At this time, 350,000 UK residents have been vaccinated and Health Secretary Matt Hancock stated 500,000 people will be vaccinated by the end of the week.

The new coronavirus strain combined with the increasing probability of a no-deal Brexit (with fisheries and a level playing field remaining the main friction points), will likely drag the Pound lower in the coming days, but we may also experience irregular volatility on most Forex pairs as Christmas approaches.

Key Events for the Week Ahead

As you would expect, this week lacks major economic releases, as the world prepares for the Winter Holidays. Tuesday’s most notable release is the US Final GDP, scheduled at 1:30 pm GMT, while Wednesday, December 23 we will get an insight into the US housing situation with the release of the New Home Sales numbers, scheduled at 3:00 pm GMT.

Thursday and Friday, banks across Europe, the US, and other parts of the world will be closed in observance of Christmas Eve and Christmas Day, thus no major releases will occur and volume will likely be very low, which may lead to unpredictable moves.

Chart Analysis – GBP/USD

After reaching a high at 1.3625, the pair dropped significantly and opened the week with a gap, currently trading at 1.3240, below the previous resistance level situated at 1.3400.

This return below 1.3400 combined with the fundamental scene (new coronavirus strain and failed Brexit negotiations), is likely to generate a drop into 1.3100 support, where price will also encounter the 100 periods EMA. The two support types (horizontal level plus dynamic S/R represented by the EMA) will create a confluence zone, which under normal circumstances would likely stop (or temporarily pause) downwards movement. However, considering the low volume seen throughout the week, a break of the mentioned support is not out of the question.

On the other hand, price gaps tent to be closed more often than not (meaning that the price will return where the gap originated), thus we may also see a return above 1.3400. Bottom line is that you will have to use more caution and be more conservative with your entries during the Winter Holidays because price action will be unpredictable.