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Brexit 'Doomsday' Warnings Ignored by a Resilient Sterling

Brexit 'Doomsday' Warnings Ignored by a Resilient Sterling

Nick Cawley, Strategist

Sterling and Brexit News:

  • UK PM May remains four-square behind her contentious Brexit deal.
  • Limited Sterling moves despite central bank economic warnings.

We have just released our Brand New Q4 Trading Forecasts including USD and GBP.

Sterling Ignores BoE ‘Worst-Case Brexit Scenarios’ For Now

The Bank of England analysis of various forms of Brexit produced the expected shock numbers and doom and gloom warnings of severe economic contraction, along with precipitous falls in UK house prices and the value of Sterling. And while these warnings are necessary, it may be that the worst official analysis is now out in the market and factored into the price of the British Pound.

According to BoE’s worst-case scenario analysis – not forecast – GBPUSD could fall by up 25% and below parity (1:1). This would take it below the 1985 record low of around 1.03 – 1.05.

Bank of England GBPUSD Data 1975 - 2018

Brexit 'Doomsday' Warnings Ignored by a Resilient Sterling

A look at equally trade-weighted Sterling against G7 currencies shows that while is weak, it has been substantially weaker over the last year. Again a 25% maximum fall would take it near/into record low territory. While the BoE does have to show the ‘worst-case scenario’, traders are taking the results with a pinch of salt and waiting for the outcome of the December 11 Brexit vote.

Equally Trade-Weighted Sterling vs G7 Countries (2015 – November 29, 2018)

Brexit 'Doomsday' Warnings Ignored by a Resilient Sterling

Brexit Timeline – The Path Ahead

As we head towards the House of Commons Brexit vote, the PM continues to push her deeply unpopular deal, seemingly oblivious to most of her party and the House telling her that the proposal will fail in its current form. It is against this backdrop that others are now becoming more vocal about either a Norway-style agreement or a Canada++ deal. While both options may be more expensive to the UK economy in terms of lost growth - according to official government figures – they may provide the flexibility and the opportunities asked for by large sections of the House and the UK population.

Sterling is a touch lower – around 0.30% - in European turnover against a range of currencies but is holding its own against a mildly weaker US dollar. Before the Brexit vote on December 11, there will be five days of debate in Parliament where MPs will be able to put six amendments to PM May’s plan for a ‘meaningful vote’. It may be at these sessions that a slightly clearer path ahead may be seen, giving Sterling traders a better steer for the months ahead.

Recent Brexit/Sterling Articles:

Sterling Waits for UK Government to Publish Brexit ‘Impact’ Analysis

Brexit Latest: President Trump’s Trade Warning Damages Sterling

EURGBP: Pending Long as Support Nears – Tight Stop

GBPUSD support at 1.2662 is expected to hold ahead of these sessions, while bullish price action meets resistance from 1.2920-1.2930 onwards.

GBPUSD Daily Price Chart (March – November 29, 2018)

Brexit 'Doomsday' Warnings Ignored by a Resilient Sterling

IG Client Retail Sentiment shows that traders are 72.6% net-long GBPUSD, a bearish contrarian signal. However recent daily and weekly positional changes suggest a mixed GBPUSD trading bias.

Traders may be interested in two of our trading guides – Traits of Successful Traders and Top Trading Lessons – while technical analysts are likely to be interested in our latest Elliott Wave Guide.

What is your view on GBPUSD – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author at nicholas.cawley@ig.comor via Twitter @nickcawley1.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.