› Is the British pound going to fall like a rock?

Is the British pound going to fall like a rock?

The United Kingdom entered an unknown territory after Britons made the historical decision to leave the European Union. With less than 50 days remaining to the official divorce date, the UK economy, currency and investment attractiveness is under the gun of uncertain consequences of the Brexit. The financial markets’ unclear sentiment regarding British stock benchmarks, government debt yields and currency exchange rates are obvious due to the recent volatility. Major British financial instruments are seeking direction and traders wonder when this period will show the light at the end of the tunnel.

Mike Carney, the Bank of England Governor and the Monetary Policy Committee Head, made a clear statement during his latest press conference after the interest rates decision that the regulator is not going to step in until the government will present exact rules of the game after Brexit. He also underlined that things aren’t so bad as it was previously anticipated and the British economy has a huge potential to grow, while the Pound is undervalued. The only problem is the lack of any exact rules in many economic spheres and business sectors, which weighs on investor’s confidence for a brighter future. The intraday chart of GBP/USD (one-hour timeframe) perfectly shows the downside whipsaw and sharp rebound right during Carney’s press conference which underlines the fact that currency speculators are not ready to drop Sterling under the floor, trying to catch any positive word or phrase in an endless flow of negative news related to Brexit.

The British Parliament rejected Theresa May’s deal with the European Union which was hardly negotiated during a long period. The deal conditions aren’t acceptable in many points including one of the toughest issues of the negotiation process - the Irish border and so-called backstop rule related to the labour market. An impressive number of ministers and top-officials left May’s cabinet, expressing disagreement with Premier Minister’s wish to give up strategic interests in order to avoid a hard no-deal Brexit. The political landscape is separated with many scenarios on the table including May’s resign, new elections and even a second Brexit referendum in order to cancel the decision and stay in the EU. May even managed to withstand two non-confidence motions in the Parliament, promising to present better deal conditions. She’s going to Brussels this week in order to ask EU officials about re-negotiation of some crucial points of the deal. So far, the continent is saying no.

Despite the negative background, the British Pound managed to recover a decent part of its losses recently, adding almost 3% to its value versus the US dollar after 9% plunge last year. That fact only shows that GBP/USD was extremely oversold which does not correlate with the economic potential and investment attractiveness. However, a no-deal Brexit scenario might eliminate that optimistic sentiment and the Sterling could lose the ground, charting new all-time lows against major currencies. That is the central red line of many analysts and economists at largest hedge funds, institutional investors and banks, including Mike Carney, who warned about such an outcome.

Technically speaking, GBP/USD is still in a long-term downtrend despite the recent test of 1.3200 resistance. The psychological round-figure level of 1.3000 does not have any meaningful impact of pivot points calculation, so the fact that the current price is below that barrier does not guarantee the downtrend continuation. What really matters is the Fibonacci Retracement levels just because other technical indicators and tools are not showing any perspective due to the lagging nature and the market’s uncertainty and volatility. As the base of Fibo levels, we took the uptrend started on December 12, right after the first Parliament vote. Daily prices still do not have close below 61.8% Fibo which means the uptrend is still in play. There are shadows and tails on daily candlesticks ut that means nothing as the Pound is a tricky animal and it loves false breakouts. Moreover, the current price is well above the 89-days simple moving average, which started edging up, confirming the bullish sentiment. SMA89 was exactly the level, from which intraday action bounced off recently.

As a result of those observations, we’ve got the nearest support range between 1.2862 (SMA89) and 1.2841 (Fibo 50%). We would even consider aggressive small-volume deals on the call-options side, counting on a bounce up. But this could be dangerous and short-term restriction has to be applied for that kind of trick. If the bears would be able to crack that barrier, the recent uptrend will become nothing but technical retracement for the longer-term plunge and GBP/USD could easily re-test the bottom of the wider formation, which was charted on December 11. The price level of 1.2483 is also the lowest daily close since April 2017, it’s just a technical abyss behind it, so don't be surprised if the Pound would fall like a rock.

Is the British pound going to fall like a rock?


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