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At the back end of last year, we wrote an Insight entitled ‘Binary Brexit stuns Sterling’ and how choppy sterling ‘has become on an intra-day basis’. Not much has changed it seems…
Fast forward to yesterday afternoon when sterling was looking decidedly gloomy. Cable had traded below 1.28 and reality was starting to bite as Parliament was gathering after its summer recess. Broadsides from both EU Brexit negotiator Barnier’s savaging of the Chequers plan and Boris Johnson meant PM May was under pressure from all sides. Her infamous plan was now seemingly unacceptable to the majority of her own party whilst also unworkable with Brussels.
And yet, this mood all changed when Bloomberg reported that the UK and Germany might have agreed to allow a less detailed Brexit agreement, raising chances of reaching a deal. Reading between the lines, this implied that business ties have to be preserved above all else, with political issues to be negotiated post-deadline.
Even though the comments were walked back a few hours later by the Germans, we’d seen the biggest hourly move in EUR/GBP, the brexitometer currency, in months. We can see on the daily chart the long legged doji which tells a story of indecision. The lows touched the bottom of the ascending channel before spiking higher above the 20 day Moving Average. Prices closed at 0.9012 so interestingly, below the high in the 11 month sideways range at 0.9032.
Do the August highs signify a false break higher of that long-held range? The ascending channel with its higher highs and higher lows certainly looks convincing over the medium-term. Many are also not giving too much weight to the Bloomberg report and are still very cautious on sterling. A squabbling and divisive UK Parliament will not help which means the 0.91 area remains the next upside target if we see sterling sentiment crack some more. Last August’s high at 0.9306 is then a beacon for GBP bears.
That said, and as we have seen, trading sterling is very binary currently. Any notion of a solid deal or softening of the EU stance via Germany, will boost GBP further which would mean a drop through the channel and toward 0.89. For sure, we need to keep nimble in position sizing in sterling going forward.
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