GBP set for roller-coaster as triggering of article 50 nears
The UK’s triggering of article 50 to leave the EU, a possibly slowing economy and the likely hike in US interest rates suggests the next few months are going to be rocky for GBP/USD.
The odds are once again stacking up against GBP/USD opening up the prospect that the pair could breach 1.2000 in the next month or two.
This month is a crucial one for GBP/USD. Firstly, the UK is due to trigger article 50 of the Lisbon treaty starting the two-year exit from the EU marking the beginning of a fundamental change in the relationship between the two unions.
In the run-up to this event PMIs have been weakening and consumer spending could be running out of steam implying that the UK’s robust economic growth could be slowing. The big devaluation of GBP since the referendum result is starting to feed through into inflation, which will erode household purchasing power.
Then there’s the politics. Although the ruling Conservative Party looks united in contrast to the shambolic state of its rivals, there’s clearly a part of the UK establishment, which is deeply opposed to Brexit and determined to stop it as it frustrates the government’s ability to manoeuvre. The other factor is the constantly threatened second Scottish independence referendum, which does weigh on GBP and would do so even more if a referendum was actually called, particularly if the UK is in the middle of negotiating its exit out of the EU.
And when those exit talks do start, the political rhetoric and posturing will also flare up. The EU has promised the UK a very tough negotiation and is demanding a huge reparation bill as compensation. The dispute over the exit bill alone will ensure plenty of fireworks helping to drive considerable volatility on GBP crosses.
Yet another negative related to exiting the EU, is concern over the future of key industries such as automotive and financial services, which feeds worries over the UK’s 5% current account deficit.
Secondly, the US Federal Reserve looks poised to raise interest rates this month, particularly if Friday’s Non-Farm Payrolls make a strong reading. The interest rate differential could widen considerably between the UK and US if the Fed follows through on its rhetoric of quickening the pace of rate rises.
In the meantime, it remains to be seen if US President Trump can deliver on his promises to fire up the US economy to new levels of growth – much of that will depend on getting bills through Congress. However, he is bound to get much of it into legislation given Republican dominance of Congress.
This all looks very negative for GBP/USD. But there are a couple of positives. Global growth is accelerating, even the crisis-prone Eurozone is seeing some of its best growth in years. This is good for UK exports, which are increasing, and sentiment towards risk currencies such as GBP.
Also, the UK’s intention to trigger article 50 has been so well flagged that it won’t come as a surprise to the markets when it happens – there’s a chance, albeit a small one, that GBP could initially rebound on the basis of expectations becoming news and it does confirm that the UK really is leaving the EU, which in itself is a form of certainty.
TECHNICAL ANALYSIS: GBP/USD set for the next leg down?
It was widely anticipated that as the triggering of article 50 neared for the UK to begin the exiting process out of the EU, GBP/USD would fall and so far, it seems to be doing just that.
GBP/USD enjoyed a bit of a recovery in January, but recently started sliding again, though in the short-term, the range of roughly 1.2000-1.2700, established since October, does not seem to be in imminent danger. Further out could be a different story. Between June and October, the pair were in a range of roughly 1.2800-1.3500, so GBP could establish a new range, maybe somewhere around 1.1300-1.2000.
If a new downtrend is in process, it would need to get below 1.2200, which would likely trigger short-selling. Currently, support levels can be seen around 1.2214, 1.2162 and 1.1986. In terms of resistance, there’s 1.2318, 1.2414 and 1.2492.
In the meantime, the pair have punched through the lower Bollinger band, often a sign that a period of consolidation is due to occur and as of late last week, that appeared to be happening. Later this week the pair could test downside support around 1.2200, failure to breach it could take cable up to levels around 1.2400.
By Justin Pugsley, Markets Analyst, MahiFX