- Geopolitics and central banks are likely to see GBP/USD thrown into the 'blender' in Coming weeks.
- GBP/USD has perked up beyond a key resistance line that could open the flood gates towards 1.2300, if not 1.2600.
- On the downside, as volatility increase, 1.2000 is the critical support area.
GBP/USD has been on a solid footing of late, even able to sidestep the various mounting gloom and doom stories from around the world with the UK and US yield curve thrown into the mix of uncertainties that the FX space is now facing. Not least, trade wars, the Federal Reserve and being a crack away from the ice breaking in the eurozone economy are all risks facing the Pound which could be due a very turbulent time in coming weeks.
The pound has found demand on prospects of a Brexit-deal breakthrough and some robust data that has surprised markets. However, a more precise analysis of the reason why the pound has been clawing back some ground is likely as it couldn't get below a critical support level and the non-committed bears have started to pull out ahead of what is likely to be a very volatile period ahead for sterling.
GBP/USD shorts had been mounting-up in May and July, with the last real surge in that latter part of July. There have been some significant buying back in GBP of late by asset managers covering those short positions which, again, likely suggests that the market is getting set for a turbulent time ahead when UK MPs return back to Parliament after their summer recess on September 3rd - Indeed, this is time to buckle-up and trade with caution when it comes to Sterling crosses.
"In the past few months speculators have built large short positions in GBP and this can make the currency more sensitive to any sniff of (Brexit) compromise," analysts at Rabobank said today in relation to the moves we have seen following Boris Johnson's meetings with Merkle and Macron.
Boris gets a pat on the back for the markets
"While speaking at a news conference in Hague, German Chancellor Angela Merkel said that they can work on finding a regime that keeps the Good Friday agreement and also ensures the integrity of the EU's single market. "We can also find a backstop solution by October 31," Merkel added.
The British pound gathered strength on these remarks and the GBP/USD pair spiked to a three-week high of 1.2241. As of writing, the pair was up 0.9% on the day at 1.2235 and the EUR/GBP was at its lowest level since July 27 at 0.9058, erasing 0.88% on a daily basis," - Breaking News, FXStreet
How fickle the markets can be, and forgetfull for that matter. It was only yesterday that Merkle was saying that he was prepared for a no-deal Brexit. All what this really means is that she has challenged the UK government to come up with a solution to the Irish backstop issue (that would avert a no-deal Brexit) within the next 30 days - If May couldn't do it in two years, how is Boris expected to do it in 30 days?
What's more, Johnson has accepted the challenge in an acknowledgement that the onus is well and truly on the UK to avoid a no-deal Brexit - Well, surely that seals a No BREXIT deal then, doesn't it?
"The obvious difficulties in inventing an alternative to the Irish backstop combined with the fact that the PM has previously indicated that he is prepared to go through with a no-deal Brexit does not, in our view, offer much solace for GBP investors," analysts at Rabobank concur.
So what now?
Unless there is some miracle that Boris can conjure up between now and Oct 31st, Britain WILL leave the EU without a deal.
Between now and then expect GBP volatility, especially as MPs return from summer recess on the 3rd September which will be accompanied by a set of very inconclusive headlines.
There will be MPs that will be trying to stop a no-deal Brexit, including Labour leader Corbyn. Corbyn has indicated that a no-confidence vote in PM Johnson is likely - but can he win it? Perhaps, after all, PM has a working majority in the House of Commons of just one. However, Corbyn's popularity rating has hit the skids in recent weeks, so timing is key and it may not be a tactically wise decision at this time. and, in the same vein, some Labour MPs represent Brexit-backing constituencies and could abstain or vote in favour of Johnson.
In summary, analysts at Rabobank conclude on the matter as follows:
"It remains our central view that a delay to Brexit beyond October is likely. This, however, would be a grave threat to the Johnson government and possibly the Tory party also. Although a no confidence vote in the PM could usher in a caretaker government, this would be temporary and the UK could be faced with a snap general election potentially before the end of the year. This would mean continued political uncertainty in the UK and an even more prolonged period of Brexit ambiguity. Consequently even though a delay to Brexit would likely trigger some relief in GBP markets, we anticipate that EUR/GBP could be hard pressed to fall below the 0.90 level on this scenario on a three month view. On a no deal Brexit we see scope for EUR/GBP to rise to parity."
Cable smoothy anyone? - Going back over the years, in expecting volatile times ahead for GBP, it should be noted that the pair can be whipsawed in ranges from anywhere between 200-1000 pips over the curse of a single day. One of the periods that stands out n the daily charts were back in 2015 when cable was thrown about between 1020 pips over three consecutive days when the ATR was just 127 pips. This was before Brexit and when the MPC was remarking about the strength of the currency, where two members thought about voting for hikes again. it coincided with when the USD was under pressure due to the Fed’s cautious removal of the word 'patience' in their statement on a Fed rethink - which we can compare to today's climate around the Fed. Throw in Brexit, tradewars, the European and Chinese recession talk, debt leveraged derivative markets and a massive shortfall on offshore Dollars in EM markets ... (the list goes on), 1000 pip moves could well be back on the cards. 1.2000 is key to the downside while 1.2600 is the equivalent to break the recent ranges.
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