GBP/USD Roiled by Brexit Headlines: The Only Certainty is Uncertainty
GBP/USD Talking Points:
- It’s been a dramatic past week in GBP as Brexit headlines continue to make waves. Little is clear on the Brexit-front at this point, except for the fact that we’re likely in for continued volatility and short-term noise as we near Brexit negotiations between the EU and the UK.
- While the bearish theme in GBP/USD has been running for the past four months, a big support level came into play in mid-August which continues to mark the yearly low in the pair. This could constrain profit potential for bearish approaches, at least until that low is tested again; and the topside of the pair leaves something to be desired after last week’s bullish breakout was entirely faded out of the market ahead of this morning’s open. Brexit headlines will likely continue to drive near term price action in a noisy manner.
- Quarterly Forecasts have just been updated, and the Q3 forecast for GBP/USD is available from the DailyFX Trading Guides Page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.
Want to see how retail traders are currently trading GBP/USD? Click here for GBP/USD Sentiment.
GBP/USD Falls Back-Below 1.3000
It’s been a wild week of price action in the British Pound, and this extends what’s become a rather dramatic past four months for the currency.
After coming into 2018 riding a wave of strength that started early last year, prices posed a brisk reversal in mid-April and sellers remained in control into mid-August. This is when the 23.6% Fibonacci retracement of the Brexit move came into play, and since then, no new lows have been established. What initially started as a stall in the bearish trend soon turned into a retracement, and then last week we saw a bullish breakout after some comments from the EU’s Chief Negotiator, Michael Barnier, appeared to eliminate the Hard-Brexit option from the equation. Prices quickly firmed above the 1.3000 psychological level, and as we wrote at the time, that change had the potential to bring on a larger move of strength as shorts covered to take into account this new, softer stance out of the European Union.
GBP/USD Weekly Price Chart: Four-Month Down-Trend Finds 23.6% Support after 78.6% Resistance
Chart prepared by James Stanley
What’s happened since then has been a cautionary tale of chasing headlines. Shortly after this week’s open, rumors began to float that Mr. Barnier wasn’t too happy with PM Theresa May’s Chequers plan, which brought this post-Brexit partnership mentioned last week into question. GBP/USD quickly fell and continued all the way down to the 1.2800 level that we were following for support.
And then this morning, another rumor began to float that Germany, the de facto leader of the EU, was willing to drop key Brexit demands while seeking less detail in regard to post-Brexit ties. GBP quickly popped-higher, but when that report was rebuffed hours later, prices in GBP/USD fell right back-down to 1.2900, making for a messy day of headline-driven price action.
GBP/USD Hourly Price Chart: Bullish Breakout (in Blue) Faded-Out (Maroon) Leads to Topside Pop this Morning (in Green)
Chart prepared by James Stanley
At this stage, GBP/USD has instilled a valuable lesson that could continue to pay dividends in the coming months: Brexit-driven headlines can (and will likely) continue to roil price action, particularly on a short-term basis. Not only do we not know what’s going to ultimately happen with the Brexit-split, but even if we did know what was going to happen, we have no clue what type of longer-term repercussions will be seen. And if those long-term repercussions aren’t immediately visible, then short-term price action will likely remain messy as those themes and new pieces of information get priced-in as market participants try to find a directional move that can last. This can make for a daunting environment for short-term traders.
For those looking to take a longer-term stance, stepping back from the short-term noise to look for a more well-defined theme could be an attractive way of moving forward. On the topside of price action, we looked at resistance at 1.3043 last week, and that did a good job of holding the highs from the bullish breakout. Traders can look for a test above that level to open the door for higher-low support, which could be sought out in the prior zone that we were working with through the month of August that runs from 1.2913-1.2956.
GBP/USD Four-Hour Price Chart: Messy Near-Term
Chart prepared by James Stanley
On the bearish side of GBP/USD, matters feel a bit more dangerous. The 1.2800 level held the lows two weeks ago, and that came back in play earlier this morning. But – the level of 1.2671 is a long-term support area that previously reversed an aggressive down-trend, and holding on to shorts for a revisit could be of challenge as we have the potential for a higher-low here given how obvious and well-known this support now is. That could limit profit potential for bearish strategies, and given how wide of a stop may need to be used to adequately trade the move, this can be an unattractive prospect with our current setup.
To read more:
Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.
Forex Trading Resources
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--- Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.