Currency Gets Pounded During Brexit Negotiations

With tariff and trade-related headlines dominating the financial news cycle these days, other important stories are being pushed to the wayside. While the discussions between China and the US will have wide-reaching implications on the Global Economy, right now European Markets are much more concerned about the Brexit negotiations between the EU and UK than anything else.

David Bloom, HSBC's Head of Foreign Exchange Strategy, was on Bloomberg Markets today discussing what he referred to as a "massively uncertain political situation" in the UK regarding Brexit plans. He explained that the worst case scenario for the UK economy would be leaving the EU without a deal in place. In fact, we've seen the British Pound come under pressure in recent months as the "No-Deal Brexit" outcome has started to look more and more likely.

Here is a chart of GBP/USD showing prices bouncing off support at key prior lows ~1.20 from 2016/2017.

The British Pound is at its lowest level relative to the US Dollar since the fall of 2016. The Pound collapsed to fresh all-time lows around 1.20 in October of 2016 on the heels of the Brexit Referendum on June 23rd, which is when the UK first voted to leave the European Union (annotated on chart). In the time since, GBP/USD has consolidated in a new range between 1.20 and  1.40. Notice GBP/USD was never able to reclaim its pre-Brexit levels since selling off in the summer of 2016.

Considering the price memory at these prior lows this would be a logical place for prices to regain their footing and reverse. GBP/USD just confirmed a failed breakdown as prices undercut year-to-date lows around 1.20 and came within a basis point of their all-time low before reversing back above August's high of 1.23. Prices are now up 3% since making a fresh 52-week low intraday on Tuesday.

Here is a long-term chart of the currency pair flipped around and denominated in Pound terms. As you can see, the US Dollar is consolidating just beneath all-time highs relative to GBP.

Is this a near-term bottom and the start of a counter trend rally in GBP/USD? Or are prices just consolidating before the resumption of their structural downtrend? Both could turn out to be the case but for now prices just confirmed a failed breakdown and positive momentum divergence with a move back above August’s high of 1.23. While this is no more than a mean reversion opportunity, the current setup offers an asymmetric reward with well-defined risk as prices are just several basis points off their all-time low of 1.19. Maybe the worst has already been priced in related to Brexit.

Hope you enjoyed this post! As always, reach out to me at Strazza@thechartreport.com with any questions or comments.