Brexit Talks Spike GBP/USD Volatility, Options-Derived Range

Talking Points:

• GBP/USD one-day & one-week implied volatility at 17.36% & 12.12%, highest of the majors
• This may be due to upcoming speeches from Theresa May and Boris Johnson on Brexit issues
• Is Cable reversing? A bearish engulfing on the daily and an evening star on the weekly chart

See how the British Pound is viewed by the trading community at the DailyFX Sentiment Page.

The British Pound was not left out of the action during last week’s extraordinarily volatile week of aggressive risk aversion striking the markets. A hawkish Bank of England “Super Thursday” event pushed Sterling higher before it came falling back down as EU’s chief negotiator Michel Barnier warned about a Brexit transition. More choppy trading seems to be in store for the currency this week.

Implied Volatility and Market Range

From the chart above, GBP/USD 1-day and 1-week implied volatility take the spotlight of having the highest readings in the FX majors spectrum. The 1W and 1D levels are at 12.12% and 17.36%, the most in more than two and five months respectfully. Upcoming Brexit speeches from key officials might explain this.

A series of talks in the coming weeks from Prime Minister Theresa May and other Cabinet members are supposed to offer descriptions of the relationship UK is seeking with the EU. Mrs. May is scheduled for a talk on security matters on February 17th after Foreign Secretary Boris Johnson presents a speech on February 14th. If the markets reacted more dramatically to Brexit updates as opposed to fresh fundamentals from the BoE last week, let’s see where government officials might take Cable.

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GBP/USD Technical Analysis: Bearish Engulfing and Evening Star

On a daily chart, GBP/USD continues heading lower after forming a Bearish Engulfing on February 2nd. The decline occurred as negative divergence emerged in RSI and a rising support line was broken. Since then, Cable has been stuck on the 38.2% Fibonacci level at 1.3842. From here, we will look at where the outer boundaries of the options-derived range take us.

If GBP/USD turns higher, an area of interest might end up the “week range high” around 1.4065. This is because this price sits just above the 23.6% level and could potentially pose as a place of resistance. A break above that would expose the 1.4153 14.6% minor retracement.

The British Pound can also continue heading lower. Immediately standing in the way as support is the rising trend line from mid-November. Interestingly, the “day range low” seems to align with this line. A push below it would leave the “week range low” at 1.3601 as the next possible are of interest. This might end up as stubborn support because this was GBP/USD’s former resistance back in September and during the beginning of the year.

On a weekly Chart, GBP/USD formed an Evening Star by Friday’s close. However, this does not mean that a more long-term reversal is necessarily imminent. Like other candlestick patterns, bearish confirmation will be needed.