Over the past 5 weeks, all GBP movements have been based on Brexit developments. The rejection of snap elections, ‘hard’ Brexit risk and the null and void’ declaration of prorogation of Parliament have created a ‘strengthening’ scenario in the GBP as ‘perceived risks’ have diminished.
However, Brexit is anything but a ‘diminishing’ risk, a hard Brexit is still a real possibility and the extension of Article 50 goes against everything the PM stands for as he would ‘rather die in a ditch’ than ask for it despite the Benn law forcing him to do so – Risk.
UK economics has also been slightly ignored over this period, I would point out that the latest Bank of England (BoE) meeting passed a 9-0 vote to maintain its main interest rate at 0.75% and simultaneously reiterated its view ‘that gradual and limited interest rate increases would be required over the medium term’ which is a positive. However, this is based on the idea there will be a smooth and orderly Brexit transition.
Yet, drilling down into the statement, the BoE point outs that underlying growth had begun to slow and that spare capacity is re-emerging. Exhibit A: the August retail sales figures falling 0.2% which should drag annual growth down to 2.7%.
Further to this, the trading technicals are pointing to clear points of exhaustion.
Brexit has caused GBP/USD to trade into 3-month highs of $1.255, while EUR/GBP hit a 3-month low of £0.88 for the same reasoning. But, on deeper evaluation the Brexit rallies were unable to push the GBP through the strong resistance levels here and the 5-week rally has failed to see it break out.
The daily candles are showing solid inverted patterning suggesting the Brexit rally is now facing fatigue and profit-taking. Recent trade has seen traders reverting pairs to the mean as they recalibrate ahead of the EU summit on October 17. Brexit will drive direction in the GBP over the coming weeks to October 31, but one should expect a bit of selling in the GBP as profit is lock-in.