The Plunge And Pullback of The UK Currency Post Brexit

It all started on June 24 when 52% of U.K.’s 65-million population decided to break nearly four decade old relationship with European Union and voted for a free UK. The move provided biggest attack to the European politics since fall of Berlin Wall and echoed sentiments of 2008-09 crisis. The UK Currency, British Pound (GBP), responded with a plunge of 8% in a single-day of referendum result that shook global financial markets. Even if some of the headline data-points have started helping the GBP to slowly come out of its early July lows, the currency is still 10% down as compared to pre-Brexit highs, making it the biggest looser of 2016 among majors. Let’s discuss some of the underlying factors which played crucial role in present state of the GBP and also analyze the future trend.

Negatives

Biggest amongst all was the EU referendum result that showed 52% population voted for UK cessation from the EU on June 24. However, speculations concerning monetary easing from BoE further dragged the GBP during early July and the actual outcome of 0.25% rate-cut, together with 60 Billion Pound addition to central bank’s Asset Purchase kitty and pessimistic forecast in Quarterly Inflation Report, magnified its downside on August 04. Additionally, the latest release of a year’s fastest contraction in Manufacturing Production again started the fresh downside of the UK currency.

Positives

When the market was expecting strong monetary policy measures after Brexit, BoE Governor disappointed everyone during mid-July with no action and that triggered first round of pullback. Moving forward, upbeat CPI, Claimant Count Change and Retail Sales offered second round of recovery in mid-August while early September’s release of Manufacturing, Construction and Services PMI helped the GBP to print two-month high.

The Way Forward

Having analyzed what gave pullback moves within the broader plunge of the UK currency after Brexit, it becomes wise enough to discuss what’s now on the card for GBP traders to watch.

During his latest testimony to Parliament’s Treasury Committee, as a part of Inflation report hearings, the BoE Governor sound optimistic with recent data-points and boasted the central bank’s ability to act when necessary. He then said that downside risk of the Brexit have started receding due to central bank’s rate-cut and QE efforts. However, some of the MPC members were still favoring the need of additional monetary easing if the economy loses its momentum and hence highlighted the importance of September 15 BoE meeting.

At political front, Theresa May’s “Brexit brainstorm” session at August-end confirmed the Brexit decision and closed door for any second referendum while failing to provide any signals on Article 50 which will start the process of UK exiting the EU politically after two years.

Moving towards the data-points, optimistic prints of headline PMIs and an unaffected second estimate of GDP print might continue restricting GBP downside ahead of the mid-September when CPI, Jobs report and Retail Sales are scheduled for release.

Hence, while recent hawkish comments of the BoE Governor, coupled with early month releases of upbeat data-points, might continue helping the UK currency to avoid further downside,  the previous Manufacturing Production becomes a drag for the GBP before another round of headline economics, up for mid-month release. Given these details disappoint GBP traders, the Pound can again adhere to profit-booking sessions towards testing July lows.

Technical Trends

As the pair continue observing short-term ascending trend-channel, chances of its up-moves are higher; however, 1.3480-90 horizontal area become crucial for short-term trader of the GBPUSD, which if broken negates chances of its another pullback and can fuel the pair to 1.3630. Given the pair mange to surpass 1.3630, coupled with optimistic data-points during mid-month, chances of its rally towards 1.3850 and the 1.4050 become brighter.

Alternatively, 1.3165-50 region, comprising channel support and 50-day SMA becomes an important to observe, breaking which 1.3050 and the 1.2930 are likely intermediate halts that the pair can avail ahead of revising the July lows around 1.2800 mark. In case the pair continue declining below 1.2800, becomes vulnerable to print 1.2500 mark on the chart.

Cheers and Safe Trading,

Anil Panchal

Opinion section article is written by Anil Panchal, a senior analysts at Admiral Markets.