After a steady decline starting September and falling into an all-time low, the struggling British pound was able to rise on Wednesday on news that Prime Minister Theresa May gave lawmakers some scrutiny of the process in leaving the European Union on condition they did not damage her discussions with 27 other members of the bloc.
This decision by the British Prime Minister had soothed the nerves of the market, which had worries of a so-called “hard Brexit”— that the UK will surrender its full access to the EU’s single market in order to impose full control on its borders. These worries in particular had sterling plunge to 31-year lows in the previous week. On Friday, it lost a steep 10%.
On the monthly time frame of the GBP/USD chart above, the pair was driven to its lowest in record after a steady decline starting July 2014. Meanwhile, viewing the chart on a daily time frame, we can see that the pound dove to a 31-year trough of 1.18612 on October 7, Friday. The pound has been plagued by concerns over a hard Brexit over the past weeks, and has taken its toll by plunging on Friday.
Additionally, the weak sterling has aroused fears that inflation could strike the UK. The doubt that emerges over the country has shook investor confidence which has further fuelled bearish bets on the currency.
As of writing, GBP/USD is up by 1.05% to 1.2251. Despite the recovery, the sterling is still lingering year lows from where it is. Adding to the beating is the US dollar, which hit a 7-month high of 97.817 today. The greenback has been rising steadily on growing hopes that the Federal Reserve would hike interest rates as early as this year, with markets pricing in about a 70% chance of an increase in December.
May’s offer comes ahead of a court ruling set tomorrow, October 13, which will conclude if the Prime Minister can activate Article 50 of the Lisbon Treaty by March 2017. Article 50 is defined as the law that starts the process of separating the UK from the EU.
Several lawmakers are appearing to prefer a soft Brexit, or naturally, no Brexit at all. Investors are concerned that a hard Brexit could hurt the trade and foreign investment required to fund the UK’s massive current account deficit, one the largest in the developed world.
Hans Redeker, Morgan Stanley's head of currency strategy, stated that "After weeks of tough rhetoric pushing sterling into a trading environment closer to an emerging market currency, the government may aim to stabilize markets, with its rhetoric and suggestions now possibly shifting in tone.”
Redeker further added, "However, there is a fine line to walk as May's Conservative Party wants a clean split from Europe. In addition, giving in too much, even before Article 50 negotiations have started, shifts the negotiation advantage towards the EU. Hence, the pound's rebound should be limited and followed by a decline."
With this, May’s statements support the sterling. However, the trend for the GBP/USD is clearly bearish—strongly so, even, that we recommend traders to sell despite today’s brief rebound.
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