Where now for the pound, post article 50?

With the UK government triggering article 50, we take a look at the future of the pound amid all this uncertainty.

Pound notes
Source: Bloomberg

As the UK enacts article 50, the talk of the town within financial markets is just how this process will affect the value of sterling going forward.

To understand the extremes we are currently trading within, GBP/USD's monthly chart below highlights the fact that beyond the price action seen in the past five months, we are trading within levels only seen some 32 years ago.

GBP/USD monthly price chart

Sentiment

One issue that should be understood as a precursor to predicting where the pound is going is that of market knowledge. Understanding that markets are supposed to reflect all currently known information, it is worth attempting to forecast what information could cause a shock to pound valuations. With article 50 out of the way, we now turn to the negotiations process, which will last a minimum of two years. The tones coming from these negotiations are unlikely to be positive, for it is in the interest of the EU to play down the fortunes of the UK, given the desire to see UK jobs move abroad. Similarly, we have already seen the UK adopt a combative tone, saying that a hard Brexit is highly likely. Such ongoing commentary would probably harm the pound, yet with a significant amount of talk already priced in, we would need to see something of particular weight to really move the market.

The outcome of such tones leads us to the next topic, which is corporate announcements. There is no doubt that many firms will see the activation of article 50 as a prerequisite before they take steps to mitigate any potential ill effects of the Brexit process. That means we could begin to hear a number of firms move jobs and operations out of the UK. This represents yet another potential knock to the pound should we see a sufficiently large quantity of such announcements. However, the threshold of such announcements would be relatively high, with the recent downside likely to have factored in a significant amount of such corporate adjustments.

Technicals

Another way to look at the pound is through charts. Considering that we have a relatively high threshold for news-based adjustments, there are a handful of signals which we could look at in a search for signs before we are set for our next major move. In this section, it is worth looking into three key sterling pairs to help guide us as we move forward in the coming months of trade.

GBP/USD

Of course we had to start with the most commonly-traded sterling pair, which has exhibited a clear downtrend in recent years. The weekly chart below highlights the ongoing symmetrical triangle formation, with GBP/USD turning lower from the top end of that pattern this week. For the most part this is a continuation pattern, which points towards a likely resolution of further losses. A break back through $1.2798 would provide a signal that this could be over, yet for now we have seen little to say that this pair is on the cusp of a rally.

Interestingly, in the last three years, we have seen a shift in the way the stochastic provides a bearish signal. The 2014 sell-off was preceded by a long-term overbought signal. The 2015 sell-off was preceded by a shorter overbought signal. The 2016 sell-off saw the stochastic fail to reach overnight territory. Finally, with that trendline resistance evident on the stochastic, there is a good chance that we could see the next leg lower in the not so distant future. Conversely, a break back through $1.2798 would be a strong bullish signal for the pair.

GBP/USD weekly price chart

GBP/EUR

Despite the UK’s exit from the EU, we have seen the euro emerge as the winner over the past 18 months as traders focussed on the potential downfall of the UK economy. Much like GBP/USD, we are seeing GBP/EUR forming a symmetrical triangle, which is perceived as a continuation pattern.

However, given the recovery seen in the lead up to this formation, there is also a potential bullish story here. Ultimately we would need to see a break through $1.2041 to complete a bullish inverse head and shoulders formation. Until that occurs, there is still a good chance we could see another move lower for the pair.

GBP/EUR weekly price chart

GBP/JPY

Finally, we have the pound traded against the main safe haven currency, the Japanese yen. Looking at the weekly chart once more, we can see that GBP/JPY has been perfectly respecting a resistance trendline. This trendline has subsequently brought us back towards the crucial ¥136.42 support level. A break below that and we could see a more protracted move back into the ¥130.00 region.

There is a good chance that we could be looking at a retracement before we move higher once more. However, the ¥136.42 level will be crucial in dictating whether that will happen or not. Conversely, watch out for a potential break through ¥144.79 as a signal that we are set for another strong leg higher for the pair.

GBP/JPY weekly price chart

Ultimately there are a number of potential leftfield issues which could impact the value of the pound over the coming years. However, with the technical largely pointing towards a continuation of the sterling weakness evident over the past years, we are still some way from saying that we have bottomed out.

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