GBP/USD Rallies After the BoE Warns of Brexit-Recession Potential
GBP/USD Talking Points:
- It’s been a busy morning around the British Pound, as the currency came into the day holding on to trend-line support. A mild bounce was quickly sold on comments from BoE Governor, Mark Carney, in which he warned of recession potential in the event of a no-deal Brexit.
- But buyers held prices at trend-line support, after which USD-weakness began to take-over after some comments from FOMC Chair, Jerome Powell. While both Messrs. Carney and Powell were dovish in their commentary today, this was far more shocking and a much larger change-of-pace from Chair Powell, as markets had grown fearful of an overly-aggressive FOMC going into 2019 and thereafter. The net response on the day is 95-pip gain on the day in GBP/USD, amounting to a move of .75%.
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GBP/USD Bounces From Bear Trap
GBP/USD had set up a fairly enticing bear trap in the early portion of this week, and I discussed this setup in yesterday’s webinar. While short-term momentum in the pair was undeniably bearish, prices had run into a level of support as taken from a trend-line produced in 2016/2017. Just underneath that price were a series of nearby support levels, and considering the fact that GBP/USD had put in higher-lows in late-October and mid-November, there was a building case for a longer-term support play, as discussed in Monday’s article entitled, GBP/USD: Cable Builds Support as Retail Traders Load-In.
The major drawback to bullish approaches in the pair was twofold: Brexit headlines have been an absolute nightmare, and there hasn’t been much for positivity on that front of recent. But, perhaps more importantly and potentially related, was the fact that buyers weren’t able to show much on tests of highs. While support was building in fairly-well, sellers remained on the sidelines to punch-down any topside advances. This was likely related to the theme of US Dollar strength, which remained fairly visible into today’s open; until the speech from FOMC Chair Jerome Powel.
GBP/USD Daily Price Chart: Hold of Long-Term Support
Chart prepared by James Stanley
BoE Warns of No-Deal Brexit Risks
In perhaps an item of ill timing, just before Mr. Powell’s comments, another driver was at work in the British Pound, and this came out of the Bank of England. Mark Carney said that a disorderly Brexit would put the UK in an economic contraction that would be even worse than what was seen during the Financial Collapse. Mr. Carney and the BoE noted that the worst case scenario around Brexit could see unemployment rise to as high as 7.5%. House prices could fall by as much as 30% with the UK economy shrinking by as much as 8% in a single year. He also commented that it could amount to a drop in the British Pound by as much as 25%.
To put that in scope – a 25% hit to the current Cable spot would be .9629; almost a full thousand pips below the all-time-low that was set in 1985 before the Plaza Accord went into effect.
These are some stark warnings and, to be sure, the British Pound fell, at least initially on the back of those comments. But – support held around that trend-line projection that we talked about on Monday; and shortly thereafter a strong spate of selling developed in the US Dollar that’s pushed Cable up to fresh daily highs.
GBP/USD Five-Minute Price Chart: Soften to Trend-Line Support After Carney, Bulls Blast-Off After Powell
Chart prepared by James Stanley
Are Bulls Back in the British Pound?
It’s still too early to say for certain, and, at least at this point, there are simply more attractive areas to look for USD-weakness. I looked into a few of those in yesterday’s webinar but, at this point, to re-establish bullish exposure in GBP/USD, traders will likely want to see continued performance in that direction. The 1.2900-1.2928 area appears to be key for such, as this area on the chart provoked a rather visible reversal in the latter-portion of last week, just after the pair caught a bump-higher on news of the EU approving Theresa May’s Brexit deal. And this brings on another point of contention: December 10th brings on the vote around Theresa May’s Brexit plan to Parliament, and it appears very few actually expect this to pass. That could be another wave of negativity that develops around the currency which could stifle a bullish trend.
So, for those looking at topside plays in the Pound, they would likely want to treat the move defensively, looking to trail stops while scaling-out on the way up. More constructively, traders can take a back seat here while trading USD-themes elsewhere, letting the GBP/USD clean up a bit after what’s become a messy past few months of price action.
GBP/USD Hourly Price Chart
Chart prepared by James Stanley
To read more:
Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q4 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.
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--- Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX