Abu Dhabi, UAESunday 25 August 2019

What's next for the UK pound after tonight's Brexit vote?

Sterling is heading into a sensitive time with a failed decision on the country's exit from the EU expected to hit the currency hard

UK prime minster Theresa May and Jean-Claude Juncker, president of the European Commission. The pound surged as the British government said it had secured changes to its divorce deal from the European Union and planned to hold a vote in the UK parliament. Photo: Bloomberg
UK prime minster Theresa May and Jean-Claude Juncker, president of the European Commission. The pound surged as the British government said it had secured changes to its divorce deal from the European Union and planned to hold a vote in the UK parliament. Photo: Bloomberg

Foreign exchange markets continued trading in a rather narrow range through the early parts of March with perhaps the most intriguing performances coming from the British pound and the euro.

The British pound is approaching a very sensitive time with the UK parliament heading into another vote on Brexit. Once this happens, we will have a far better idea of which way the UK is headed – towards a no-deal scenario (hard Brexit) or towards a possible extension of Article 50.

If a no-deal scenario begins to form as a result of an indecisive or failed vote, this would hit the pound very hard. On the other hand, in the event there is an agreement to delay Article 50 for another three months, for example, this would lend a lot of optimism and would see the pound moving higher. The currency has remained in this range between 1.29 and 1.3350 over the past month or so and we could see a clear break on either side depending on how today’s vote progresses.

Outside these two levels, expect to see a strong test of 1.27 on the downside, while a positive outcome could see levels above 1.34 in the interim. Again, it would prove prudent to see the outcome of the vote before building any fresh pound positions.

As for the euro, after hitting 1.14 levels against the US dollar in early March the currency sunk to below 1.12 levels after the European Commission slashed its euro zone growth forecasts over the next two years. In the quarterly economic forecasts, the EU revised inflation forecasts down to 1.2 per cent from 1.6 per cent in December and growth forecasts to 1.1 per cent in 2019 from an earlier projection of 1.7 per cent. Growth forecasts were expected to bounce back in 2020 to 1.6 per cent.

Citing uncertainty from the US-China trade wars, the EU also pointed to deteriorating internal factors, headlined by budget policy tensions with Italy, growing social tensions in France and overall slower manufacturing growth in Germany. The recent announcement put the European Central Bank in a rather precarious position; up until a few months ago ECB president Mario Draghi maintained a less aggressive stance towards future tightening, but left the door open, keeping euro long positions interested through the end of 2018 and the early parts of 2019.

However the EU’s growth forecasts cuts were followed by the ECB adopting a strong dovish tone, and maintained that rates would remain low through December of this year (versus June of this year at the previous rate decision meeting). Perhaps in the strongest of moves, the ECB announced a reversal in policy by introducing fresh stimulus measures – this less than three months after ending a $2.9 trillion bond-buying program. The euro sunk against its major counterparts – hitting 21-month lows against the Greenback and the British pound.

I have continuously maintained a dovish view on the euro and these recent developments will only reinforce my thoughts going forward. Expect to see some consolidation as a result of buying support at the current 1.12 handle, a move towards 1.09 by the summer could be on the cards.

Amid all the potential volatility in the markets, perhaps gold presents the most interesting and less risky opportunity. The precious metal has been trading between 1276 and as high as 1346 levels on the Dubai Gold & Commodities Exchange (DGCX). I recommend looking to long positions at 1280 levels with targets at 1330 or higher.

Finally, my outlook on the US Dollar remains positive and we maintain a slightly bullish stance on the Greenback in the weeks ahead. We expect strong resistance to factor in at 97.30 levels on the US Dollar Index, with support holding above 95.90 levels.

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

Listen: Brexit uncertainty clouds investors' outlook

Updated: March 12, 2019 03:36 PM

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