Pound Sterling – What Happened to Brexit Fears?

Who knew that the British Pound, which fell strongly just three weeks ago would recover back so strong? The initial Brexit led fears in the week of February 22nd at one point felt as if the British Pound would sink further. In fact, the Cable posted a strong 3.70% decline within a trading week as prices flirted with the lows near 1.385. The strong moves during the week saw many calling for further declines as the week opened with London’s mayor, Boris Johnson extending his support to the Brexit’s ‘OUT’ campaign. The initial panic selling saw the Cable fall to a 7-year low.

But the week after, the Pound Sterling managed to recover most of those losses. At the time of writing, GBP-USD is trading at $1.436, after touching highs of $1.443 to completely negate the declines. Over the week, the initial euphoria was also digested adding to the rally. For investors who were bold enough to pick up the Cable at the 7-year lows sure are having the last laugh. Indeed, the GBP-USD did get some support from the likes of the G20 summit which made a brief mention on the risks of the UK leaving the EU bloc and more recently the BoE’s report, which as a matter of fact was neutral but open to interpretation. The BoE’s March 18th Brexit report merely highlighted the fact that the Central bank did not take a stance on the Brexit but was rather prepared to deal with any eventuality from the Brexit’s referendum.

After the initial sell off, the markets are certainly coming to grasps with what’s at stake. While it seemed that the proponents of the ‘Out’ campaign gained initial ground a lot of questions remain unanswered making the outcome of this referendum even more difficult to guess.

According to the poll tracker from WhatUKThinks, the Remain or ‘IN’ camp are currently leading 51% to 49% who want to ‘Leave’ the EU. It is likely that the numbers will shift around a bit, but the overall opinion that is being formed is that the Brexit’s ‘In’ campaigners are likely to make more justifiable reasons than the ‘Out’ campaigners.

So where do we go from here and what to expect from the GBP-USD in the run up to the June’s referendum?

As far as the British Pound is concerned, besides the domestic factors, the US Dollar’s strength and therefore, the Fed’s policies need to be accounted for as well. Over the past few months this year, the Dollar Index has been on shaky grounds, with repeated attempts to breach the 100 level in the US Dollar- Index being rejected strongly. No matter how bearish the Pound may look over the coming months, the US Dollar’s strength needs to be considered too. The Federal Reserve, which hiked interest rates by 25bps in December 2015, is set to meet later this week. With economic data sending mixed signals, expectations are largely for the Central Bank to hold steady. This would bring down the rate hike forecasts from four as of the December’s SEP to three. For the moment, expectations are that the Fed will raise rates twice this year eventually bringing the US Fed funds rates towards 0.75% – 1.0%. That is of course, subject to the US economy continuing to post its steady growth trend and employment which has already made strong progress will continue to trend above the 200k average jobs per month.

From a technical outlook, the British Pound is likely to remain range bound into the months ahead with 1.47/1.49 coming in as the longer term resistance while support is likely to come in near 1.38 – 1.35 levels. A break out in one of these two levels is likely to set the course over the longer term horizon. Below 1.35, the round number level of 1.30 is definitely worth keeping an eye on, while to the upside, above 1.49, 1.55 will be the upper resistance level of interest.

In conclusion, with a few more months to go for the EU-UK referendum, the British Pound is likely to see some short term swings which are more likely to be a knee-jerk reaction to comments. A referendum which is likely to be a very close call could potentially pave the way for the GBP-USD over the longer term horizon. At the same time, US monetary policy will also be an additional factor to watch out for.

This article was written by Dave Goldstein, Head Analyst of Binarybrokerz.com