As GBP is a political currency – listen carefully to the PM’s speech on Tuesday
Brexit has turned GBP into a political currency, selling-off when senior UK ministers speak about leaving the EU and then it gently floats back up when they’re quiet on the topic – suggesting that the forex markets have not fully grasped the likely shape of the UK-EU relationship going forward.
In the absence of Brexit related big news there are some positives for the UK. The economy has defied predictions by motoring ahead and the UK’s political crisis after the referendum was resolved decisively and swiftly and even the IMF thinks GBP is undervalued by 5-20% despite the large UK current account deficit.
However, the general assumption in the markets is that this will all change once the UK leaves the EU, hence the upside remains limited. But senior UK ministers and especially the Prime Minister have frequently managed to put dents in GBP.
Examples of speech-induced sell-offs of GBP include the speech by Prime Minister Theresa May in October 2016 at the Conservative party conference where she talked of controlling immigration and freeing the UK from the European Court of Justice as priorities. Another occasion was a few weekends back when she told a Sky TV interviewer that the UK is leaving the EU and not staying “in bits of it.”
Soon after taking over the premiership in July 13 2016, she set up a Department for International Trade to negotiate international trade deals. Restricting freedom of movement of people between EU and UK, negotiating international trade deals with the rest of the world and judicial independence strongly suggest the UK cannot stay part of the EU customs union or even the single market given the conditions of membership.
Basically, the UK has been heading for a hard Brexit for some time, something the forex markets haven’t entirely appreciated, no doubt hoping events such as the November supreme court ruling stating a greater role for parliament in the Brexit negotiations, might derail those intensions.
However, the Prime Minister has actually been steadily clearer about her intentions and has consistently talked of getting the best possible trade deal for Britain – possibly a free trade deal. It’s not so much her whose been muddled, but maybe commentators who are not listening to what she’s been saying.
The big area of ambiguity and vagueness is over the UK’s future trading relationship with the EU, which no one can know at this stage since those negotiations haven’t even begun and probably won’t do so until after the UK has left the EU. Also, the Prime Minister doesn’t want to show her hand too soon before any serious talks begin.
The acceptance of a hard Brexit will likely come much more to the fore in the run-up and then the triggering of article 50 of the Lisbon Treaty, which starts the two-year exit from the EU. This leaves GBP vulnerable to slipping below GBP/USD 1.2000 and if it looks like the UK won’t get a transitional deal after departure or goes on to World Trade Organisation rules, then GBP could go on to test 1.1500. Nonetheless, most of the downside for GBP seems to have largely been realised as most of these factors are hardly news anymore or even particularly surprising.
Listen out for Theresa May’s speech this Tuesday. It could be a big mover for GBP.
TECHNICAL ANALYSIS: PM May could push GBP/USD below key support
Since October, GBP/USD has been in a broad range of roughly 1.2100-1.2700 and since last week it has decidedly slipped into the lower end of that range possibly even threatening to breach it. The last time pair were in that vicinity was back in Oct 2016. Also, the 20-day moving average is pointing downwards.
Given that GBP has become a political currency, superseding technicals, it is important to listen to political leaders. On Tuesday, UK Prime Minister Theresa May is due to set out her plans for the UK’s departure from the EU. This will be carefully scrutinised by the financial markets and is likely to move GBP crosses. And going by previous form, her speech could be bearish for GBP.
Support levels can be seen around 1.2162, 1.2123, 1.2089 and 1.2037. The big one is 1.2000, which is of psychological importance and beyond that the next important levels are around 1.1905 and the flash crash low of 1.1841. Resistance levels are pegged at around 1.2230-7, 1.2272, 1.2347-52 and 1.2419.