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The British Pound Breakdown

Currencies | Oct 05 2016

By James Stanley, currency analyst, FXCM

  • GBP/USD [Cable] has staged a large breakdown as a target deadline has been set for triggering Article 50 in order to begin discussions on how to divorce the U.K. from the European Union.
  • Cable gapped-lower to start the week, and the losses haven’t yet stopped.  

In our last article, we looked at the higher-lows that had built in GBP/USD in the post-Brexit environment. And as we had written, the biggest driver to the currency had appeared to be Mr. Mark Carney, Governor of the Bank of England, as each opportunity that he had to speak seemingly entailed a weaker British Pound, driven by even more dovishness from the representing Central Bank.

But over the weekend a fresh development brought upon a big move in GBP-pairs, as British Prime Minister Theresa May indicated that the U.K. will trigger Article 50 by the end of Q1 2017. This brings on the possibility of a ‘Hard Brexit’ scenario that could lead to acrimonious discussions between politicians of both the U.K. and the E.U. as the details of the split are decided upon.

This report over the weekend created a gap on the open in GBP, and the selling hasn’t yet stopped with only brief respites of very short-term support. This means that there aren’t many near-term support or resistance levels, and this makes the prospect of risk management even more daunting given a lack of longer-term or nearby price action swings as fresh 30-year lows continue to print.

This can create a real quagmire of a situation for GBP, as liquidity will likely subdue as a whole series of ‘unknowns’ become the focal point of global markets. And further, for those looking to execute swing or longer-term strategies, price action in the Cable is rather difficult to work with given that we’re currently trading at 30-year lows, and there aren’t many near-by resistance swings that can be used for stop placement.

So for traders executing short-term or momentum strategies, a bearish bias will likely remain attractive in the near-term. Top-side rips higher can be faded as resistance sets in and the prevailing, predominant trend of weakness comes back into the equation; and for swing traders this would likely be the most attractive way of handling GBP in the near-term.

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