October 8, 2018

FXTM, GBPUSD - Pound can crash if hard-Brexit fears loom

It is no surprise the Brexit newsflow continues to dictate sudden fluctuations in the British pound.

This article is originally referred from FXTM Market Forecast.

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Although what is surprising is that despite there being less than six months remaining before the United Kingdom is scheduled to leave the European Union with minimal confidence a Brexit deal is close, investors still refuse to price into expectations the potential eventuality of a hard-Brexit.

The British Pound trading close to 1.32 at time of writing evokes memories of recent history where investors have been caught off guard by political risk events.

The historic outcome of the EU referendum in the first place springs to mind as an example of this, and with the clock ticking fast towards the deadline for a Brexit deal, investors should be more aware regarding potential downside risks in the Pound.

Investors seem to be content with optimism that a Brexit agreement will eventually be struck.

I think we just need to look at the events following the recent meeting in Salzburg and the defiant comments made by UK Prime Minister Theresa May after the summit to recognise that any optimism about a deal being close should be faint.

Even if a breakthrough in Brexit negotiations is eventually struck, the upside potential in the British Pound is limited to around 5%.

This is low in comparison to how fast the Pound could crash if hard-Brexit is the eventual outcome.

The Pound is at risk of crashing back down to the lower 1.20s if investors become frightened over hard-Brexit.

There are no shortages of reasons for investors to hold negative views on the British Pound.

The assertive comments from Theresa May following the failed Salzburg meeting that a no-deal Brexit is better than a Brexit with a bad deal heavily highlights how strained UK and EU relations have become during the long-winded negotiations.

The EU is obviously not wanting to provide UK officials any favours to prevent other populist parties around Europe gaining encouragement from leniency shown towards the UK, which suggests that Theresa May will continue to struggle against EU officials.

What is also not supporting Theresa May in her quest to secure a Brexit deal that is fair to those who voted to leave the EU two years ago is the ongoing and relentless speculation over a potential leadership challenge to her position.

Reports over another potential UK election refuse to go away and investors need to see stability with leadership positions at a time when it is common knowledge that the UK will go through a period of uncertainty.

The potential for a hostile Tory Party Conference for Theresa May early October might provide encouragement for investors to take profit on Pound positions.

All of the above doesn’t mean that there is no positive news out there for the Pound.

The problem with current valuations is that investors are not positioned, or prepared at all, for a potential hard-Brexit shock.

Positive news for the Pound includes the continuation of UK economic data defying worrying forecasts of what the outcome for the UK economy would be following the EU referendum shock, and the probability that the Bank of England (BoE) will remain ahead of the European Central Bank (ECB) and Bank of Japan (BoJ) when it comes to providing guidance on the possibility of higher interest rates.

The technical outlook for the GBPUSD is somewhat conflicted by how suddenly the Pound can shift in direction due to sensitivity around Brexit newsflow.

1.30 in the GBPUSD will continue to act as a strong psychological level for investors. Ambitious investors might continue to use the 1.30 level in the Pound to drive the currency towards 1.32/1.33.

The pair would need to conclude above 1.33 on a monthly basis to instil confidence that the GBPUSD can rally above 1.35 on a Brexit agreement outcome.

Otherwise, and while Brexit uncertainty remains, selling rallies in the British Pound will be tempting for investors.

A technical close below 1.30 would signal the potential for further declines in the Cable.

Original Source: FXTM Market Forecast

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