Since June 2016 when the Brexit vote was held, the British Pound has been on a roller coaster ride. Brexit news has become the number 1 news event affecting the British Pound. As the date for the complete pull out of the UK from the EU draws near, this article will attempt to provide a news trading strategy for currency pairs linked to the British Pound.
Over time, the GBP pairings that have proven to be very sensitive to the Brexit news are GBP/USD and EUR/GBP.
What Does the British Exit (Brexit) Mean for the British Pound?
The outcome of the June 23, 2016 referendum created a massive market shock, and caused the British Pound to fall to a 30-year low against the US Dollar. Since then, volatility on the British Pound has shot up tremendously, as citizens, investors and traders on both ends of divide try to make sense of what this will all mean. As the reality of the vote outcome set in, many post-Brexit events became the focus of traders who were looking for constant clues as to how to trade the British Pound.
After months of negotiations between the UK and EU negotiating teams, several deals have been agreed on in principle. But wrangling within the British government has led to renegotiations and adjustment of deadlines for the completion of the British exit from the EU. A final Brexit deal had been reached between the negotiators on both sides, but the British Prime Minister Theresa May was unable to sell the deal through the UK Parliament, and it was voted down at least three times.
Current State of Affairs
It is not just the Brexit event itself that is affecting the British Pound, but there have been fallouts of Brexit that have caused some upheaval within the British government as well. Unable to sway the UK Parliament to accept the deal entered into between the UK and EU negotiators, Theresa May has resigned her position and attempted to call early elections. Brexit has been postponed once more to October 2019, by which time a new prime minister would have emerged. These recent events are going to dictate how the British Pound is traded from now until the last quarter of the year when Brexit should have been completed.
Outlook for GBP Pairs
What is the outlook for the GBP pairs?
The Pound has sold relentlessly in the last one month against the US Dollar, and is inching ever closer to the lows that were seen in June 2016. This steady decline has also been on the back of a strong 2018 for the US Dollar.
GBP/USD Weekly Chart
However, the US – China trade war has not been very good for the greenback, and this is also evident on the charts as the GBP/USD is finding support at 1.25800 – 1.25830. This is a zone where the currency pair had previously found support.
Volumes have also started to fall, after hitting very high levels in weeks gone by. Data from CME shows that there has been an 18% fall in the GBP/USD futures contracts average daily volumes from the 2018 figures. This is also the lowest it has been since the same time three years ago when the Brexit referendum held. With the postponement of Brexit to October 31 and the race to choose a new prime minister heating up, it may seem likely that the biggest traders are adopting a “wait and see” approach before making their moves. We may see the GBP/USD trading in the range that has the 1.3400 – 1.3410 price level as the ceiling, and the present levels as the floor. With no real pressure to trade aggressively until October 2019 approaches, the range trade for the GBP/USD may be the mid-term play. Volatility in the GBP/USD pair is expected to pick up as October approaches.
The Euro has gained more than 450 pips over the British Pound from April 2019 till date, marking the British Pound’s worst run against the Euro since 2017. The situation with the EUR/GBP remains clouded by the global economic uncertainty that has arisen from the US- China trade war, with many traders uncertain as to what economies will feel the pinch the most.
EUR/GBP Weekly Chart
The economic outlook for the British economy remains weak, as shown in the last GDP data for the UK. Brexit may have played some part, as the extended Brexit process has left investors unsure of what moves to make, causing delays in investment inflows and reducing consumer spending. Continued worsening of UK data may force the hand of the Bank of England to cut rates in the future.
On the other hand, the European Central Bank is expected to keep rates unchanged. Several scenarios could play out, even as the US Federal Reserve hinting within the week that it was open to rate cuts.
- If the ECB leaves rates unchanged and the Feds cut rates, this would lead to a rise in the EUR/USD exchange rate. Strength in the Euro and weakness in the GBP could cause the EUR/GBP to rise even further.
- If the US – China trade war degenerates enough to cause a global slowdown, central banks may get spooked and start a new round of coordinated cuts. This could prove to have downside risks for both currencies and it could boil down to which of them is hit harder than the other.
Then of course there is this other business of the new prime minister and what appetite the new PM will have towards the Brexit deal. Whether it will be someone who favours the current deal, wants a new deal or perhaps even starts to tilt towards a 2nd referendum remains to be seen. Obviously, the value of the EURGBP going forward may depend on this factor in the months to come.
The EURGBP is approaching the top border of the price channel on the weekly chart. There is still room for more upside. But as volumes thin out with traders preferring to watch events from the side as we head into October, the currency pair may trade within this range for weeks to come.