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Why I can’t see GBP staying much lower for much longer

In the wake of the pound falling to a one-year low against the dollar and a 10-month low against the euro amid fears that a no-deal Brexit is now the most likely outcome, here’s my take on where I see sterling going from here.

It is easy to have strong opinions on Brexit. But although you have to heavily factor politics into modern trading, you should still stay away from emotion. Whether you’re for or against it, the reality is that, no matter what the press say, Brexit will happen. There is no doing it over; there can be no revote. This is democracy in action. You have one equal chance to vote and the result is final.

The effect on the GBP has been clear. The pound has lost ground against most major and minor FX pairs. Although Brexit was the main reason for this, there have also been other factors that have attributed to the pound’s lack of a bid.

The lingering after effects of the financial crisis

These are the fallout from the global financial crash. Quantitative easing and ultra-low rates have created an economic landscape that old indicators and analysis are still trying to catch up with. I mean, how do you really track CPI and PPI inflation with rates held low for a decade while simultaneously printing money? There is no way to look back in the past to use it for future reference. It’s simply never happened before.

The argument for where GBP goes now is up for debate. My view is the GBP fell due to Brexit uncertainty. By that logic when Brexit happens the future will be less certain, but we will have Brexit. This has to be a reason for GBP to recover. What made it go down, once it’s addressed and becomes ‘known’, there has to be less uncertainty.

1.30 is the new 1.40

Technically and fundamentally the GBP/USD has to stay about 1.30. 1.30 is the new 1.40. We are below the 50% weekly Fibonacci and have bounced of the 61.8%. Technically we need to see a close above the 1.30 handle and get back to about 1.32 to bring in some technical buying. Once this happens a lot of the fundamental fear will be easy to dismiss.

The biggest myth out there is that every Brexit blow for the UK is good for the EU. This is not the case. The EU loses money, prestige and credibility. The risk of contagion if the UK is successful is also the EU’s biggest fear. For too long the EU has sold the idea of the EU being a true economy for all and a global power and people have bought it. But the Greece crisis, the Italian bank turmoil and the German auto industry scandal show there is very little to be overly optimistic about.

There is also the Trump factor. There has been a shift away from the dollar into euros and other ‘safer haven’ currencies due to the US president’s erratic behaviour. The GBP and the UK meanwhile have historically have weathered political and economic storms. As such, there will be plenty of bargain hunters looking at the GBP at these low levels and buying for the long term.

Remember the millennium bug?

I believe that once we get over the Y2K-style hysteria there will be no hard Brexit. Everyone has too much to lose. There will be areas that prosper and areas that suffer, but the UK and GBP are too much of a known quantity to simply be forgotten. I see GBP/USD back at 1.60 within 18 months.

USD/GBP daily chart (Jan 2015-Aug 2018)

Steve Ruffley

Chief Market Strategist, InterTrader

For more information and trading education visit InterTrader

The content of this article is the personal opinion of the author and not InterTrader. You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.

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