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Why Brexit Negotiations Could Drive the British Pound This Week

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Feb. 26 2018, Updated 4:00 p.m. ET

British pound traders remain undecided

The British pound (FXB) depreciated by 0.53% against the US dollar (UUP) in the week ending February 23. The pound (GBB) closed for the week at 1.397 as compared to 1.404 in the previous week. The price action of the pound against the US dollar suggested a tug-of-war between bulls and bears near the 1.40 mark. Economic data releases were in line with expectations with average earnings increasing and jobless claims falling. Multiple Bank of England speakers sounded confident about the UK economy, leaving no reason for the British pound to lose value last week. British equity markets (BWX) were one of the few global indexes to post losses last week. The FTSE 100 Index (EWU) was down by 0.69% for the week ending February 23 and closed at 7,244.41.

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Speculators reduce bullish positions

As per the Chicago Futures Trading Commission’s (or CFTC) latest commitment of traders report released on February 23, speculators have cut their overall bullish positions by half in the previous week. The total outstanding net long contracts fell from 14,940 contracts to 7,803 contracts. The British pound facing stiff resistance near the 1.40 mark against the US dollar could be a reason for traders to book profits on their long trade.

Week ahead for the British pound

This week, the focus will be on Brexit negotiations as we move closer to the EU Summit on March 22 and March 23. Markets are hoping a transition deal will be finalized by that date. British Prime Minister Teresa May is scheduled to deliver a speech on Brexit on Friday and this could add to the pound’s volatility. A smooth transition has been priced into the pound and any hiccups this week could lead to sharp declines in the pound’s value. Key economic data releases from the UK this week include the manufacturing report, but Brexit-related news would likely take center stage.

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