Brexit Briefing: GBP Indecision as Divorce Talks Start in Brussels

Talking Points

- GBP/USD closes in on the 200-day moving average. A potential ceiling or a new level of support?

- Retail traders up their short GBP positions over the last week; will they be proved correct?

And so it finally begins. European Chief Negotiator for Brexit Michel Barnier today welcomes UK Brexit Secretary David Davis to Brussels for day one of negotiations as the UK readies itself to leave the European Union (EU). The UK will cease to be a member of the EU at midnight on March 29, 2019 – two years after Article 50 was triggered – and it is very likely that no formal long-term withdrawal agreement will have been reached by then, with interim trade agreements expected to be put in place to help smooth the process. Today’s meeting is expected to discuss the UK divorce bill, UK and EU citizens’ rights and the Northern Ireland border amongst other topics.

UK assets are expected to have a volatile time over the coming months, with any official communications, and leaks, likely to inject volatility into the UK currency and stock markets. GBP/USD currently remains moribund around 1.2800, with current volatility extremely low.

We discussed in more detail the potential outcome for UK asset markets at last Friday’s UK Key Events and Markets Webinar. If you would like to be kept up-to-date with all aspects of the Brexit negotiations, please sign up for our next Brexit webinar here.

While we wait to hear the opening statements from both sides – expected around 1700 GMT – Sterling continues to nudge a fraction higher, towards the 100-day ma on the four-hour chart., after breaking above the 50-day ma earlier in the session. Whether this acts as resistance or provides new support could well depend on this evening’s opening statement.

Chart: GBP/USD Four-Hour Timeframe (May 30 – June 19, 2017)

Chart by IG

Another important tool when looking at a currency pair’s potential movement – the IG Client Sentiment Indicator – shows retail traders are net short the UK currency against the USD, highlighting a potential pool of buyers of the British Pound.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBPUSD-bullish contrarian trading bias.

Upcoming GBPEvent Risk

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--- Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

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