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A Look at GBP-crosses as Brexit Officially Begins

A Look at GBP-crosses as Brexit Officially Begins

2017-03-29 11:50:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Talking Points:

- Bullish on GBP once Brexit starts? GBP/CAD, GBP/NZD have been trading higher.

- Bearish on GBP once Brexit starts? EUR/GBP, GBP/CHF, GBP/JPY are your go-to options.

- GBP/USD is meandering around - not the best place to look for a directional move at present time. The crowd remains slightly net-long GBP/USD.

Throw those 'ifs,' 'ands,' and 'buts' away: the Brexit process has officially started as of this morning. At the time this article was written, UK Prime Minister Theresa May was in parliament for the weekly Prime Minister Question time (PMQ), in which she revealed that EU President Donald Tusk had been sent the formal letter declaring the UK's intent to leave the European Union. Today represents a culmination of nine months of deliberation and much hand-wringing over whether or not the June 23, 2016 vote was the right decision for the UK in the long-term. There's no reason to debate any further: it's happening.

Now that the two-year negotiating window is formally open, market participants will have to deal with the not-so-easy scenario of attempting to factor in political jockeying into their trading strategies when trading the British Pound. Brexit will not be a linear process; expect it to be messy with twists and turns. Volatility will be a two-way phenomenon: some days will be calm; other days will see GBP-crosses run sharply higher; and there will be days when GBP-crosses drop quickly.

For traders, this type of environment is not one in which you can just 'set it and forget it,' or in other words, have a passive risk management strategy when trading GBP-crosses. A bit more attention with an eye trained towards the newswire will be required. Yet because of how long the negotiating window is open, one musn't get fatigue from overstimulation. The best bet? Taking smaller positions/reducing leverage so that you don't need to sit on top of the newswire for the next 24-months.

See the above video for technical considerations in GBP-crosses, including preferences depending upon how the Brexit process plays out. If the British Pound is going to rally, at current time, GBP/CAD and GBP/NZD look to be the places to trade that bias. If you're inclined to think Brexit will be bad for the British Pound, setups in EUR/GBP, GBP/CHF, and GBP/JPY may be appealing. Additionally, watch the video for a brief discussion on DXY Index, EUR/USD, and why GBP/USD is the least preferred GBP-cross at present time.

Read more: DXY Looking for a Lifeline as it Nears Crucial Support

--- Written by Christopher Vecchio, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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