GBP’s impressive rebound is laced with risks
GBP has made solid gains over the last month on signs that the UK’s divorce from the EU may not be so hard after-all. However, traders should be very wary of trading on that theme as the current political dynamics still lean towards a hard Brexit and therefore a weaker GBP.
Indeed, it’s not unconceivable that GBP/USD could hit 1.3000 if the news-flow keeps pointing towards a ‘soft’ Brexit – but that’s an enormous ‘if’.
The latest catalyst for GBP’s upward move came last week when Brexit secretary David Davis and Chancellor Philip Hammond suggested that the UK would consider carrying on contributing to the EU budget after departure in exchange for access to the EU’s single market.
For the EU faced with having to make up for the loss of the UK’s contribution, which would be a highly politically charged process, this offer would certainly make life a lot easier for this increasingly fractious union troubled by mass migration, terrorism, nationalism, the Russian threat and a US administration under Donald Trump, which may be quite indifferent to the fate of the EU.
The soft Brexit option was given a considerable boost earlier by remarks from Bavarian economic minister, Ilse Aigner who said there should be a comprehensive post-referendum trade deal with the UK. Germany is by far the biggest beneficiary from Anglo-German trade, a relationship which is extremely profitable for German car makers.
However, though there are undoubtedly EU voices, especially from industry, who want free trade with the UK, most European leaders and the European Commission, there is a real thirst to make the UK pay heavily for its decision, financially and economically, and to make Brexit fail for the UK. In fact, making the UK ‘suffer’ for Brexit is probably the only thing all EU leaders agree upon.
Also, article 50 for leaving the EU has not been invoked and though there is an ongoing legal challenge in the high courts, the UK government seems determined to trigger the two-year departure process in March. At which point the real haggling begins, and it is likely to be very acrimonious with the EU pressing very hard with its demands – many probably very unreasonable from a UK standpoint.
But of course, this is a very complex negotiation with an equally uncertain backdrop. By 2019, when the UK is due to leave, the EU might be in the process of falling apart, especially if an anti-EU politician wins a national election. It’s possible the EU could scrape through the various elections and just keep it together, but it’s just as possible that it could be in the grips of further fragmentation and struggling to enact dramatic reforms to survive. If the latter, then the EUR could also be considerably hobbled as a massive capital flight takes place out of the Eurozone.
What all this means is that GBP crosses face considerable volatility and any strong rallies could be selling opportunities versus USD, especially once the actual divorce proceedings begin.
TECHNICAL ANALYSIS: GBP/USD – Looking very bullish
The GBP/USD chart looks remarkably bullish, forming a series of shallow dips followed by new highs and if anything, sterling looks poised to make further gains, possibly quite strong ones providing the news flow remains supportive.
Areas of resistance cable will need to overcome are 1.2840, 1.2964 and 1.3023 with support being seen at 1.2590, 1.2511 and 1.2347.
Though more gains are possible this week, the up move is starting to reach over-stretch with the daily RSI at 65 steadily creeping towards being over-bought. Again, providing sentiment remains positive what could follow is another shallow dip while the market awaits new positive catalysts to nudge the market higher. In effect, GBP is moving tentatively higher even with the US Federal Reserve looking almost guaranteed to US raise interest rate by 0.25% in the next few weeks with promises of more to come.
GBP however is moving from being heavily oversold and was at some stage bound to make some sort of recovery – the question of course is can it last. That will largely be for politicians to decide upon.
By Justin Pugsley, Markets Analyst MahiFX