by Eli Wright
On June 23, the day of the UK's Brexit referendum vote, sterling was trading at $1.487. In the months since, post the 'Leave' victory shocker, the resulting government transmutations and ongoing lack of real clarity as to when Article 50 will be triggered and how the country's trade deals and economy will be affected as it departs the EU, the pound has lost a staggering 20% of its value. Last week alone it slumped 2%, on the heels of Prime Minister Theresa May’s interview with Sky News, where she made it clear Great Britain would prioritize immigration control over full access to the EU’s single economy – essentially a hard Brexit.
As of this writing, sterling is trading at $1.2046, having slumped even lower in overnight Asia trade to 1.1988 before moving back above the pivotal 1.20 benchmark. It's at a 31-year low versus the dollar ahead of British Prime Minister Theresa May’s speech tomorrow. It’s also at a nearly five-year low against the euro, currently at 0.8793.
Tomorrow, traders will look for May to provide details of her Brexit plans. If she is able to deflect negative sentiment away from such worries as trade tariffs and European bank headquarters leaving the UK, instead clarifying how her government might soften any economic blows its European Union departure could engender, it’s possible the cable's decline could halt.
One positive development did help lift the beleaguered currency slightly today: in US President-elect Donald Trump's interview published in the UK's Sunday Times yesterday, he said he would offer Britain a quick and “fair” trade deal with the US within weeks of taking office to help make Brexit a “great thing.”
Nevertheless, there is only so much optimism May will be able to offer the public regarding a UK-friendly transition deal, for three main reasons:
First, thus far, Michel Barnier, the EU’s Chief Negotiator has taken a hardline stance in Brexit talks with the UK, saying in early December:
“Being in the EU comes with rights and benefits – third countries can never have the same rights and benefits. The single market and its four freedoms are indivisible. Cherry picking is not an option.”
Second, the Supreme Court has yet to rule on Theresa May's appeal to trigger Article 50 and start the Brexit process without a Parliamentary vote. A ruling is expected in the next week or two. Many anticipate the Supreme Court will uphold the High Court’s original demand that May secure Parliamentary backing prior to triggering Article 50.
Third, with snap elections expected in Northern Ireland following today's collapse of the Protestant-Catholic power-sharing government, until a new government is established, Northern Ireland will be unable to vote on any Brexit decisions.
Delays due to a vote in Parliament and/or prolonged negotiations regarding specifics of the UK's EU departure might buoy sterling in the short term, but ongoing questions and mounting trader uncertainty would likely begin to pressure the currency.
Looking at the monthly technical chart, the strength of recent negative sentiment toward the cable is clear.
In November, 2016 the pound inched higher, from $1.22 to $1.25. However, after EU negotiator Barnier’s assertive comments on December 6, sterling continued its downward trend. The bearish continuation has carried through to the new year as well, as demonstrated by the pound's short-lived breach of the psychologically significant $1.20 barrier within the last 24 hours.
Indeed, the CFTC report on the commitments of traders for the week ending January 10 shows a more than 1:2 ratio for long/short GBP positions.
On the GBP/USD daily chart, it's easier to see that on October 7, the pound plummeted past $1.15, but buyers quickly pulled it higher, to above $1.20. It’s been stuck in a consolidative range between $1.20 and $1.28 ever since, as buyers wait for appropriate opportunities. Based on the CFTC report, as well as the long-term downward movement the pound has experienced, it’s likely cable will break lower, possibly even consuming the entire buyer zone, dropping to $1.1449.
A quick look at the GBP/EUR monthly chart shows the euro climbing against the UK currency. With bullish momentum gathering through December and into the first half of January 2017, the single currency might push toward near-parity levels (0.955-0.98), last seen early in 2009.
