Looking at my charts of the major currency pairs this morning, it struck me how the British Pound still looked weaker than anything else and had clearly moved down in value since last week’s “hawkish hike” – exactly the opposite really of what “should have happened” after a hawkish rate hike. Ever since the U.K. voted more than two years ago to leave the European Union, the British Pound has been once of the more active and tradable currencies, expressed in both the GBP/USD currency pair and the EUR/GBP currency cross. So, when the British Pound is looking relatively strong or weak compared to the other major currencies such as the U.S. Dollar, the Euro, and the Japanese Yen, it is a wise idea to sit up and take notice.
How much longer this situation – the Pound being in the market’s focus – will last for is not hard to guess, as the exact terms on which the U.K. will depart the European Union are still being negotiated between the parties, and are unlikely to be resolved for several more months, probably at some point not long before the U.K. leaves in March 2019. As the old saying goes, traders love uncertainty. That is why I want to bring this article from CNBC to your attention today, in which a top Forex analyst at the Bank of America Merrill Lynch outlines why he thinks that the Pound has a greater potential to make a large move than any other major currency over the coming months… I assume he was excluding the Turkish Lira! He thinks that a “No Deal” Brexit, which political analysts believe is becoming increasingly likely, will result in a fall as large as about 10% for the Pound. I personally disagree and think it will be less than that, and it is always right to be very skeptical of bank analysts who are in practice often little more than “financial entertainers”, and deeply compromised by corporate conflicted interests. Nevertheless, the fact that the Pound has fallen since last week’s rate hike and talk of a “No Deal” outcome is significant. It cannot be denied that the Forex market’s consensus position on the Pound is against “No Deal”.
We can expect continuing political uncertainty on Brexit over the coming months, and this is likely to give traders opportunities on both the long and short sides if they watch which way the wind is blowing very carefully