Will a Fresh Brexit-Fear Pound Drop Force a New GBP/USD Bear Trend?

Will a Fresh Brexit-Fear Pound Drop Force a New GBP/USD Bear Trend?

4 October 2016, 06:31
Mohammad Soubra

Will a Fresh Brexit-Fear Pound Drop Force a New GBP/USD Bear Trend?


Talking Points:

  • The Sterling tumbled Monday following Prime Minister May signaling time frame and priority for Brexit negotiation
  • Fed speakers leverage the rate forecast but leave Dollar unmotivated, will RBA decision do more for Aussie?
  • Economic forecasts from the IMF may fuel risk trends and Pound trends if the view is surprising

The Brexit may be a known risk, but we don't know what the full extent of its influence over the UK economy, financial system and assets will be when everything is said and done. Even after the massive tumble from the Pound following the EU Referendum vote on June 23rd - the real impact was the 24th - there is still considerable uncertainty about the path we will actually take. In that uncertainty, we see reactions like that from GBP/USD and EUR/GBP to important updates from UK government officials. Prime Minister May announced Article 50 would be triggered in March of 2017 and immigration may be prioritized over access to the single market. Meanwhile, Chancellor of the Exchequer Philip Hammond remarked the economy could be in for serious turbulence. That was enough to push the Pound crosses to their boundaries and even nudge a few beyond the borders; but this update alone is unlikely to secure a new bear trend.

Looking for the motivation for EUR/GBP to sail through 0.8700 or leverage a GBP/USD reversal from 1.2800, we have to look for catalysts capable of swaying the broader market. The UK data on tap offers updates to important aspects of the UK economy, but it doesn't speak to the probability of a crumbling negotiation platform. While unscheduled comments like what was registered over the weekend are a non-negligible risk, the IMF's World Economic Update (WEO) due today can provide a more comprehensive, black-and-white assessment of the UK's bearings. This broad assessment of economic forecasts (to be followed by their fiscal and financial projections) can dictate more than just the Pound's bearings. Fed timing, risk trends, emerging market uncertainty, China and other active and dormant risks can be amplified by this assessment.

A persistent state of complacency has kept range solidly entrenched in the markets. Lifting this dampener is an appealing thought for most traders desperate for market movement; however, it should not be the base case forecast. If markets commit to trend development, benchmarks like S&P 500 and other risk metrics will conform. If they do not, the tentative efforts for GBP/USD and USD/JPY (pushing wedge boundaries this morning) will struggle or fail. Other event risk to watch moving forward includes another round of Fed speak, UK economic data and the RBA rate decision. It is a high bar to surpass some of the more systemic trends that are keeping the breaks on, but that doesn't mean we won't find volatility.

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