Brexit and GBP: rebound expected despite recent sell-off
The forthcoming meaningful vote could bring weakness for the pound, yet with Wednesday's vote expected to bring an extension to article 50, we could be presented with a bullish GBP position.
The pound has enjoyed a positive start to 2019, with the currency regaining ground over the course of January and February. With less than a week until the meaningful vote, we are seeing some nerves creep in, leading the pound lower. However, there is a possibility that this is going to be a buying opportunity amid expectations of further upside.
While we saw Brexit pound the price of sterling in the immediate aftermath of the referendum, we are now seeing a more specific approach, with markets typically less reactive to Brexit as a whole, and more concerned with the nitty gritty. Chief among concerns for GBP bulls is the possibility of a no-deal Brexit. For the most part, it is likely that markets will take any agreement on Brexit as a positive, with the finer details of how it will effect the economy being more evident down the line. For the most part, markets seem to be convinced that a no-deal Brexit would be the certain negative outcome from this whole process. With that in mind, short-term traders should be aware of the positive effect anything that reduces the chances of a no-deal Brexit would have.
Next week will be crucial for the pound, with Tuesday’s meaningful vote bringing about the possibility of a last-minute revival for UK Prime Minister Theresa May’s deal in parliament. However, in many ways the decision to allow for two further votes in the event of a second rejection of her deal has raised the likeliness of such a rejection. The brinkmanship associated with believing a rejection of her deal would secure a no-deal Brexit has now been removed, and the EU will now be skeptical of the possibility they provide a last minute concession, only to be rejected and forced to cede further ground in the future. As such, in the likely event that the EU provides little by way of further concessions, the UK parliament would be expected to reject the deal. This takes us into stage two, where we see the dislike of a no-deal scenario reflected by a vote to extend article 50 to allow for further negotiations time.
As such, it is worth noting that the two scenarios which would be almost certain to drive the pound lower would be a vote to push on with a no-deal vote, or else a rejection of an article 50 extension. Neither are likely to happen, and thus the most likely event is that we see a multi-month extension to the timeline for leaving the EU. This would likely be positive for the pound, meaning that the downside we have seen throughout this past week could present a better buying opportunity by the time the second round of votes come about. The table below highlights the estimated likeliness of each outcome, alongside the impact on the pound. The first vote is likely to be a rejection of May’s deal, providing some downside for the pound. However, that could be a welcome continuation of the recent GBP/USD weakness, setting us up for a positive reaction to the expected following two votes.
|Vote 1 (Tuesday)||Vote 2 (Wednesday)||Vote 3 (Wednesday)||GBP positive/negative||Likeliness|
|Theresa May deal approved||Positive||20%|
|Theresa May deal rejected||Negative||80%|
|No deal approved||Negative||5%|
|No deal rejected||Positive||95%|
|Article 50 extension accepted||Positive||95%|
|Article 50 extension rejected||Negative||5%|
The GBP/USD chart below highlights the resurgence seen throughout 2019, with the break above $1.3298 providing us with a signal that the pair may have bottomed out. The subsequent pullback we are seeing thus looks like a retracement of the $1.2773-$1.3350 rally, with a bullish reversal expected to come back into play before long. A break below $1.2773 would bring about a more bearish picture.
Meanwhile, the EUR/GBP picture shows a continued strengthening of the pound, with this week’s European Central Bank (ECB) decision doing little to help the pair. This has taken us below the £0.8621 support level, bringing about the first lower low since 2015. With this in mind, there is a strong chance that we have established a top for this pair. A break through £0.9116 would be required to negate the bearish view.
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