The British pound will remain under pressure for weeks
Gaurav Kashyap says the currency may experience brief rallies on the back of perceived optimistic developments
Weakness picked up in sterling crosses this week after prime minister Theresa May cancelled the parliamentary vote at the eleventh hour, which was set to take place on Tuesday.
Mrs May is struggling to garner the necessary vote from her Conservative party and she aims to now head back to Brussels to renegotiate more favourable Brexit terms.
Following the announcement, European Council president Donald Tusk tweeted that they would not be renegotiating a deal, including the backstop and are preparing themselves for a no-deal scenario. The British pound sunk to 20-month lows against the US dollar amid heaving selling pressure following these developments.
Gauging the current scenarios, at present it seems the UK is facing a hard Brexit or a situation where parliament looks to revoke Article 50. Unless of course the prime minister risks her political career to force another vote, which at this point looks hard to pass.
This will keep the pound under pressure through the weeks ahead with brief rallies on the back of market perceived optimistic developments.
Another broader move downwards would expose 1.2350 levels on the Dubai Gold & Commodities Exchange (DGCX) GBP/USD contract; a level which would have to hold before it could approach 1.20 levels.
This could all change if the UK parliament vote to revoke Brexit; Earlier this week, the European Court of Justice ruled that the UK could cancel its exit without the permission of the other 27 EU members and effectively remain within the EU on its existing terms.
Naturally if the latter comes to fruition, this would lead to strong upsides in sterling crosses. It is going to be a testing couple of weeks for the UK; and it would prove prudent to once again adopt a wait and watch approach when it comes to pound trading strategies. Limited exposures with tight stop losses would see out this period of uncertainty.
Amid all this Brexit uncertainty, the UK data docket has shown signs of improvement, so keep an eye on some key figures through the weeks including UK inflationary data due out next Wednesday, which is expected to grow to 0.2 per cent month-on-month and 2.5 per cent year-on-year.
This will be followed by the Bank of England rate decision due out on Thursday December 20, in which rates are expected to remain unchanged – with all nine Monetary Policy Committee members expected to vote to hold. Again, if we notice a small shift in that 0-9 voting pattern, this could provide upside relief on a very short-term basis. However this scenario looks unlikely as the MPC would be waiting to see how the Brexit negotiations pan out.
US dollar pricing has been choppy through the start of December, trading between 96.30 and 97.50 levels. While consolidation above 97 levels is expected through the end of 2018, there are a couple of key data points to watch out for that will dictate dollar pricing.
This includes the overall US inflation rate due out on Wednesday. Both the month-on-month and year-on-year figures are expected to come in weaker – at 0.1 per cent and 2.2 per cent - down from 0.3 per cent and 2.5 per cent respectively. With such negative inflation forecasts projected, any beat on the number should be supportive of dollar long positions intraday. The inflation data will set up dollar pricing through the rest of the month as the next big release is the December 21 GDP reading.
The US data docket provides the background to the ongoing US-Sino trade wars story, which will yield more developments through the two weeks ahead. Following the announced delay to the tariffs at the recently concluded G20 meetings in Argentina, markets rallied. Any future developments of a similar nature would see nice buying support particularly in US equities through the weeks ahead.
Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti
Updated: December 11, 2018 02:24 PM