GBP adjusting to triumph of politics over economics in Brexit saga
Not unsurprisingly, political considerations and ideology are taking precedence over the coming UK / EU separation, which for the moment points to a hard Brexit and more pressure on GBP.
In fact, GBP/USD has scope to make further losses in the short and medium-term as markets are highly likely to over-shoot on the downside, possibly even touching USD/GBP 1.1000, as the whole Brexit saga turns nasty and emotive with the outcome shrouded in uncertainty. Amid all the posturing, goodwill seems to be melting away on both sides.
And despite, all that is spoken about the consequences by Remainers and Brexiters – no one truly knows the consequences of separation or the kind of trade deal the two parties will strike – if any.
We do now know the UK will give formal notice to leave the EU by March 2017 with Brexit by March 2019 and there seems to be a growing realisation that there will no free market access unless it is accompanied by free movement of labour. If the speeches at Conservative party conference are anything to go by – then the UK is heading for a hard Brexit. Though it must be stated that not everything said during party conferences necessarily becomes policy – the rhetoric is partly for public consumption and to pump up the mainly Eurosceptic party faithful.
The UK government wants to control immigration, to be sovereign over rule making and has no desire to help subsidise the troubled EU once outside it. The EU, meanwhile, is clearly leaning towards punishing the UK and even Germany is coming on-board with that sentiment. And the EU has form when it comes to putting politics ahead of economics – just ask Greece (Forced Euro bail-outs and punishing austerity) & Russia (trade sanctions). Also, it will be far easier for the 27 EU countries and the EU parliament to agree among each other a bad deal for the UK than a good or even a mutually beneficial one.
Though GBP/USD could be in the doldrums for up to several years while the acrimonious divorce plays out – Sterling will eventually recover and could do so quite strongly for 7 possible reasons:
1/ The UK has a flexible and adaptable economy and it will pivot towards alternative faster growing markets. Following recessions – new companies and industries always seem to emerge.
2/ Imports of basic manufactures and food could become cheaper for UK consumers if the government scraps EU import barriers after leaving and therefore support disposable income.
3/ The government is set to launch a series of infrastructure projects, which tend to create a lot of economic activity, hopefully they’ll be kicking in by 2019.
4/ Remarkably, the UK economy has proved resilient to all the doom & gloom even leading to some Bank of England officials hinting that they may have over-reacted. Admittedly, the real economic tests will come post-Brexit.
5/ An independent UK will be able to draft its own rules and have the freedom – if it chooses to exercise it – to make the UK economy more dynamic and shape its own trading relationships.
6/ Getting the bad news out now i.e. a hard Brexit reality should get most of the big falls for GBP out of the way now. Anything different will therefore be a GBP boosting surprise.
7/ Foreigners will snap-up bargain UK assets, such as real-estate.
In the meantime, GBP/USD promises to be a roller coaster as it gyrates on posturing by UK & EU politicians and the eventual divorce settlement. After that it will be a long hard slog for the two to negotiate a trade deal – if they have the energy or intention of doing so.
TECHNICAL ANALYSIS: GBP/USD likely to consolidate ahead of further falls
Following the flash crash during Friday’s Asian trading session, GBP notched up the dubious distinction of performing even worse than the Argentinian Peso and versus USD has hit its lowest levels since 1985.
There seems to be some dispute as to what the true low was for GBP/USD that Friday. Reuters suggested it was 1.1491 while EBS put it at 1.1841. Either way, both numbers are now potential targets for the bears.
For the time being the two will probably stabilise somewhere around 1.2300-1.2600 providing there are no further big negative news announcements. On the dailies, GBP/USD is still stretching out the lower Bollinger band, the RSI is oversold and the slow stochastics have generated a strong buy signal. These are likely to iron themselves out before further big moves play-out.
Though the long-term trend continues to look very bearish with a test of GBP/USD 1.1000 still possible, the shorter-term looks more like a consolidation play pending a further catalyst for another big downside move, which could come at any time.
Support can be seen at 1.2378, 1.2319, 1.2227 and 1.2147 while resistance can be found at 1.2467, 1.2477 and 1.2606
By Justing Pugsley, Market Analysis, MahiFX