What's next after parliament's failure to get a deal and the Article 50 extension
'Brexit Balking' plebiscites have captivated the public's attention in recent weeks. Of the four options selected by MP John Bercow, none of them gained traction with members of Parliament. Known as Motion C: Customs Union, Motion D: 'Common Market 2.0', Motion E: Confirmatory Public Vote, and Motion G: Parliamentary Supremacy - all failed to win majority support.
Prime Minister Theresa May's plans were scuttled numerous times, leading many to believe that an ugly Brexit is a likely outcome. The closest motion to pass, Motion C: Customs Union failed by a whisker, 273 votes for and 276 votes against. With all the hullabaloo in Parliament, it's proving increasingly difficult to garner support for any proposal that allows the UK safe passage from the European Union.
The future relationship between the UK and the EU is in jeopardy. A no-deal situation would result in the UK severing ties with the EU, sans an agreement in place. In such a situation, the World Trade Organisation (WTO) rules would kick in regarding all commercial dealings between the UK, the EU and other countries.
The EU currently represents one of the biggest customs unions in the world, and is certainly the most robust. Customs unions prohibit members from negotiating individual trade deals with other countries. As one might expect, the bitter political infighting and uncertainty is having an effect on the Queen's currency.
On a hypothetical level, it is quite possible that a breakthrough in negotiations could prove especially beneficial to the GBP, allowing it to rally against competing currencies. The more likely outcome is that the ongoing political shenanigans will invariably weigh heavily on the GBP and result in a degradation of confidence. This typically takes the form of a depreciating currency characterized by mass selloffs of GBP. The back and forth on the Brexit timetable is anything but certain and the goal posts are continually shifting. Now, it appears that the Brexit deadline will be much later this year, but the precise date remains uncertain.
While the GBP/USD pair - the cable - is trading in a tight range between 1.299 and 1.309, the tectonic plates could easily shift and swallow up value propositions in holding GBP. The objective is a soft Brexit; whether or not that can be achieved depends on how much political capital the incumbent PM has in Parliament with MPs. The future relationship between Britain and the European Union hangs in the balance and will do so for several years.
Technical Considerations
The GBP/USD pair is one of the most heavily traded majors in the world. The 200-day moving average of the pair is 1.299 and the 50-day moving average of the pair is 1.310. A cursory glance at the chart indicates an appreciating GBP since December 2018, from approximately 1.255 to its current level of 1.316. That the 50-day moving average is marginally higher than the 200-day moving average is reflective of a slight bullish bias.
Irrespective, the whipsaw behaviour of the GBP/USD pair is evident with the sharp depreciation in February 2019, and extreme volatility in March. This 'rapid cycling' is limited to pennies, but it represents a chink in the armor of those holding GBP. When we extrapolate further back to November 2018, it is clear that negative trends have characterized trading activity with sterling. Multisession periods of mass selloffs have certainly weighed heavily on the GBP/USD pair.
Is Now the Right Time to Sell GBP?
The lack of clarity regarding the future of the UK is clearly having an impact on sterling trading activity. The British pound has struggled amid an ocean of uncertainty ever since the results of the Brexit referendum were made public. It is increasingly difficult to formulate a trading plan for sterling, given these wild daily swings.
This phenomenon has shifted sterling from being one of the world's safe-haven long-term bullish prospects to a category of currencies that is increasingly volatile, albeit to a lesser degree than currencies like the ZAR. Algorithms which monitor the news for trader sentiment are finding it difficult to keep pace with the wild swings in GBP price movements. Brexit stories number in the hundreds, and all of this data needs to be evaluated to effectively provide deterministic patterns.
According to Razvan Nichitoiu, Editor-in-Chief at InternationalMoneyTransfers.org, 'A large number of individuals are growing increasingly concerned about GBP prospects. This has manifested in substantial selloffs of GBP to protect their holdings from further degradation.' The rationale behind such activity is vested in a pessimistic future outlook for the GBP. An individual with UK property holdings worth £1 million at a current exchange rate of 1.3100 would have the equivalent of $1.31 million.
However, if the lack of confidence in the U.K.'s ability to negotiate an exit strategy from the EU places downward pressure on GBP, that £1 million property could be faced with an exchange rate of 1.26 to the greenback, resulting in a currency exchange rate of $1.26 million - a loss of $50,000. The situation can continue to spiral if the lack of confidence in GBP grows.
Such is the sensitivity of the GBP to soundbites and Brexit woes that even a proverbial sneeze can set the pigeons aflutter. The situation is so bad in certain quarters that various hedge funds have now refused to trade the GBP altogether. As a result, we are now seeing various trading bots making spurious calls on buy/sell options casting doubt on the reliability of such trading mechanisms. Overall though, experts concur that 'the trend is your friend' in trading activity and with so much negative press, one can expect GBP selling to continue unabated.
This article is provided by a 3rd party contributor and does not reflect the opinion of ForexLive staff
