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Currency Market Analysis

Sep 11, 2019 | Currency Market Analysis

Global Themes

Will wild swings in sterling continue?
- GBP/USD to $1.30 or $1.15?
- GBP/EUR approaching potential pivot point?


GBP/USD to $1.30 or $1.15?

It’s been a volatile year for the British Pound, plagued by politics and the ongoing Brexit dilemma. GBP/USD has traded in a 14-cent range so far over 2019, topping out at $1.3380 in March before falling for two consecutive quarters and notching fresh 3-year lows around $1.1950 last month. Will the pound weaken further south of $1.20 versus the US Dollar or are we witnessing the start of a prolonged recovery?

UK lawmakers are suspended from parliament until October 14, the EU summit is slated in for October 17-18, the current Brexit deadline is on October 31, and a general election is beckoning before year-end. Unpredictable political developments and uncertainty is driving the value of the pound, though many investors remain on the side-lines, waiting to see how it all unfolds. Critical questions linger - how, when, or if, the UK will leave the EU and which party/parties will run the UK? After the last Brexit extension was announced in April, GBP/USD dropped over 9% in four months, mainly due to no-deal Brexit fears snowballing. The currency pair is now up over 3.4% since that low because it seems as if a disorderly Brexit is off the table this year, but the risk has not been eliminated so how high can sterling really climb?

- Initial resistance can be found at $1.2380, which has acted as a ceiling this week, but if it cracks, $1.25 could be on the cards. Beyond this level, key simple moving averages hover above, which could act as magnets for investors targeting further upside. To confirm a long-term trend reversal, GBP/USD needs to breach $1.30, which last traded in May and is a level over 5% away from today’s rate.

- Unfortunately for sterling, there are many hurdles to overcome for this upside to evolve. In reality, even if a no-deal exit is avoided in October, it only prolongs uncertainty until the next deadline. A general election could bring yet more downside risk and should the recent recovery rally recoil back under $1.20, traders may look to at the 2016 October flash crash low of $1.1491 as their next downside target.


GBP/EUR approaching potential pivot point?

The pound has been clambering out of its hole against the Euro since snapping its worst weekly losing streak on record in early August. Rising nearly 4.5% from a 10-year low, barring the flash crash in 2016, GBP/EUR is on track for a fifth straight weekly gain. A potential pivot point lies at €1.1250, which is a 50% retracement of the 14-week depreciation. A convincing break above could be the turning point needed for sterling to challenge higher yearly highs.

Like GBP/USD, the pound fell circa 9% versus the Euro over four months after the last Brexit extension. The selling of the pound ran out of steam as no-deal Brexit fears receded. The selling bias on the common currency mounted amid fears of a recession in Germany and additional stimulus by the European Central Bank (ECB) to support the struggling Eurozone economy. GBP/EUR has thus climbed nearly five cents from last month’s low of €1.0720 and is flirting with the key 100-day simple moving average at €1.12, which is proving the next short-term hurdle.

The ECB meeting on Thursday is a key focus for Euro traders. If the central bank cuts rates more than expected, the selling pressure on the Euro could fuel further gains for GBP/EUR and allow a test of the crucial €1.1250 area. Beyond this lies the 200-day simple moving average at €1.1311, which traders may eye as the next target. A break of this pivotal level may be the catalyst to accelerate further upside.

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