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Pound Sterling Tumbles Towards the End of Q1 Erasing Nearly All Gains

Sterling kicked off the first quarter of 2021 on a negative note. Even though it marked the first time in 48 years that Britain was going to trade outside the European Union, warnings of tighter lockdown measures outweighed the Brexit deal. The GBP/USD trading pair fell by 1.85% throughout the week of January 1st to hit a low of $1.3450 ten days later as uncertainty mounted.

Bullish momentum reignited after the Democrats won effective control over the U.S. Senate. The thought of a bigger stimulus package had market participants overwhelmingly bullish about the future. 

While the Pound continued rising against the U.S. dollar, variants of the virus causing a faster spread of the disease in the U.K. haunted investors. The truth of the matter was that the nation's economy was struggling. Regardless, Bank of England governor Andrew Bailey dismissed reports that claimed the financial institution was considering the possibility of implementing negative interest rates.

Bailey’s poker face was well received by investors pushing Sterling higher. The boost was also fueled by strong employment numbers and an unemployment rate well below expectations. Furthermore, the fact that vaccinations were rising steadily in the U.K. created the illusion that the economy was going back to “normal” much quicker than anticipated. 

Sterling continued to push north, approaching the 2018 high of $1.4377. The Markit index in February was at 49.70, helping strengthen buyers’ confidence. The notion that the Bank of England was going to refrain from allocating new funds under quantitative easing and from cutting the interest rate help the Pound advance further. 

Despite the optimism in the markets, the GBP/USD trading pair had its first losing week on March 1st after almost two months of upward momentum. 

The downward pressure accelerated as the Office for National Statistics revealed that Great Britain's exports of goods to the European Union plummeted by a whopping 40.70%, while imports fell by 28.80%. The country's gross domestic product also dropped by 2.90% given the substantial decline in industrial and manufacturing production. This represented the biggest contractions since the lockdown measures started in 2020.

The U.K.'s announcement that it would have to rethink its vaccination campaign put more pressure on Sterling. Only 2.60% of Brits had received the second vaccine dose by mid-March. Although tensions with the European Union threatened the country’s vaccine supplies, both parties released a joint statement looking for a “win-win” solution which soothed the public mood. 

From a short-term perspective, it seems like the Pound could make the most of the “reciprocally beneficial relationship” that the E.U. and the U.K. are building to tackle the pandemic. However, the technicals points to a steeper decline as the Tom DeMark Sequential indicator has presented a sell signal on GBP/USD’s 1-month chart. The bearish formation anticipates one to four month’s of downward pressure before the uptrend resumes. 



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