BofAML: British Pound "Almost Impossible to Trade"

For those watching the direction of the Pound, and becoming increasingly frustrated by its moves - you are not alone. Big-hitter analysts at one of the world’s largest investment banks fell the same.

In a note to clients dated October 26, Athanasios Vamvakidis at Bank of America Merrill Lynch Global Research reflects, “GBP is almost impossible to trade, regardless of ones' view on the final Brexit outcome.”

Vamvakidis notes Sterling is currently subject to random headlines on UK politics and the Brexit negotiations.

“The BoE is about to hike in response to tight labour markets and high inflation, but the economy is slowing. It is also hard to have a strong view on the final Brexit outcome, as a trade deal will likely need more years of negotiations than the UK government seems to expect,” reflects the analyst.

The call comes as Sterling enters a rangebound pattern against both the Pound and Euro.

The Pound-to-Euro exchange rate is stuck between the floor ~1.11 and ceiling ~1.13 since early October while the Pound-to-Dollar exchange rate is stuck between a floor ~1.30 and a ceiling around 1.33.

“Although the downtrend has been breached the bulls are certainly not in control here and the almost instant unwind of the rally just shows the number of false starts and false breaks you get with trading Cable now. The market is fast turning into a range play now between $1.3025/$1.3335 and the momentum indicators levelling off on the daily chart reflect this,” says Richard Perry, a technical analyst with Hantec Markets, reflecting the frustrating tone to the Pound’s recent trading patterns.

As mentioned, the problem appears to be Sterling’s fixation on headlines - something almost impossible to predict; particularly headlines pertaining to Brexit.

The UK government will have to decide in the next few months between asking for a long enough extension of the Brexit negotiations or walking away and going to the WTO rules.

“We would give an almost zero probability to the UK government's current plan to have a trade deal by the end of next year and then to transition to it in the following two years,” says BofAML’s Vamvakidis who notes trade agreements usually take 5-10 years.

“They could take even more in the Brexit case, as they will include too many countries. This suggests binary and extreme outcomes for GBP,” says Vamvakidis.

The only thing Vamvakidis is confident on forecasting is that volatility surrounding the UK currency has the potential to grow.

“We remain long volatility,” says Vamvakidis.