Pound to Gain on Dollar + Euro Near-Term but is a Sell at Key Levels: Natixis
- The Pound to Euro exchange rate today: 1.1552
- The Pound to Dollar exchange rate today: 1.2338
GBP's ‘super-Tuesday’ saw it make its biggest intra-day rise against the Dollar in 23 years following the speech from Prime Minister Theresa May in which she said that her Brexit negotiation strategy would be put to a vote in the houses of parliament.
The rally was fuelled primarily by investors banking on Parliament watering down a ‘Hard’ approach, according to analyst Nordine Naam at Asset Manager’s Natixis.
“The market seems to be hoping that Parliament will seek to soften the terms of this exit, which is the reason why Sterling rebounded by almost 3% on Tuesday and implied volatility subsided,” says Naam.
The decision to put Brexit to a parliamentary vote, however, does not “attenuate uncertainties” over Brexit which remain high, says Naam.
"The one real surprise was that Theresa May announced that the government will put the final deal that is agreed between the UK and the EU to a vote in both Houses of Parliament, before it comes into force. This could make it more complicated to complete the UK’s exit from the European Union in that many Members of Parliament are Remainers," says Naam.
The ostensibly higher probability of a Softer Brexit emerging due to the vote, may be built on false hope.
“This speech does not attenuate political and, especially, economic uncertainties. On the contrary, as the UK is set for protracted negotiations to secure trade agreements with the European Union, its main trading partner,” commented Naam.
The UK may well end up wishing it had the author of the Art of the Deal at the helm rather than Mrs. May as it will start negotiations from a weak position, with “little room for manoeuvre” says Naam.
A major problem for the UK - and by extension Sterling - lies in the assumption that the European Union can quickly agree on a trade deal.
"The UK has little room for manoeuvre and is in a weak position to negotiate. When Article 50 will be activated, it could take almost 18 months only to negotiate the terms of exit from the E.U. Negotiations on the future relationship with U.E will begin only after. Furthermore, if no agreement is reached rapidly with the European Union, the risk is that the customs tariffs defined by WTO would apply," says Naam.
Given the difficulty witnessed by Canada in agreeing a free trade deal with the EU and the inordinate length of time spent on negotiations, the chances of the UK – which is not exactly very popular amongst its European neighbours – managing to get them all to agree to a similar trade deal looks very slim.
For analysts at HSBC, falling back on WTO tariffs represents a diamond-Hard Brexit which could see the Pound fall to equality with the Euro and Dollar.
A Stronger Rally is now Highly Likely
Despite the soggy fundamental outlook, in the near- to medium-term Natixis believe GBP can gain in value.
"A stronger rally is now highly likely, as the daily indicators have turned around and the weekly stochastic has picked up," says technical strategist Micaella Feldstein at Natixis.
Feldstein is looking for gains to extend to 1.2412 (which is the 9-week moving average) ahead of a test of 1.2503-1.2512 (which are the weekly Bollinger moving average and declining trendline).
"Note that a break above these last barriers would reduce the downside threats of a dip back to 1.1980-1.20 and would pave the way for a sustained recovery to 1.2760 (declining trendline) and 1.2955 (9-month moving average). The supports are at 1.2245-1.2260, at 1.2118, at 1.1980-1.20 and at 1.1860," says Feldstein.
Pound a Sell
Overall, whilst the short-term rebound in Sterling looks strong enough to extend to 1.25, the medium-to-long term outlook looks fragile argues Naam.
“The GBP/USD could eventually test 1.25, which we would see as a sell level, that is unless the US dollar extends its correction, which is an unlikely scenario over the medium term, as the solidity of US economic growth will fuel inflation, in turn, the tightening of the Federal Reserve’s monetary policy,” commented Naam.
Also seeing the prospect for further gains are analysts at Credit Suisse who would allow for the GBP/USD to rise towards 1.28, from where it is a sell once more.
