This Pound-to-Dollar Rate Slump is a Buying Opportunity, Analyst Says

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- GBP slumps as Gov impedes anti-Brexit MPs with prorogation.

- Move makes 'no deal' Brexit more likely, but far from a certainty. 

- And charts flag GBP as a buy after major trendline crossed over.

- Commerzbank set to buy more GBP just beneath new lower level.

- Nomura says 'no deal' can be avoided, but BMO has other ideas.

The Pound slumped to the bottom of the G10 league table Wednesday in response to an attempt by Prime Minister Boris Johnson to curtail a rebellion among anti-Brexit MPs by shutting down parliament, although technical analysts at Commerzbank have suggested the fall is a buying opportunity. 

Prime Minister Johnson is planning to suspend parliament some time over the coming weeks until October 14, when a Queen's Speech will be held, in what Downing Street says is a legitimate move that has domestic purposes but which critics claim is an attempt to force through a 'no deal' Brexit. His manoeuvres have got traders fearing that a 'no deal' exit is again becoming more likely this Wednesday, which could lead to punishing losses for the Pound if borne out.

One consequence of Johnson's move if it goes through is that opposition MPs in parliament, and some Conservative Party MPs, will have less time with which they could attempt to pass legislation that prevents the UK from leaving the EU on October 31. Sterling had rallied at the opening of the holiday-shortened week amid speculation a cross-party coalition of anti-Brexit MPs had the numbers to force Johnson into requesting an extension of the Article 50 negotiating period. 

That earlier rally took the Pound-to-Dollar rate above a key trendline on the charts, which technical analysts at Commerzbank say has opened the door to a more protracted period of recovery. They recommended earlier on Wednesday that clients bet on a rise in the exchange rate in the weeks ahead.

"GBP/USD has eroded its 3 month down channel at 1.2272. It is only just above the downtrend, nonetheless it has closed above here and for now we will go with it. This opens the way for recovery to the 55 day moving-average at 1.2393 and the June high at 1.2784. Dips lower will find minor support at 1.2181, the 20th August high, ahead of the 1.2015 recent low and TD support at 1.1988," says Karen Jones, Commerzbank's head of technical analysis. 

Above: Pound-to-Dollar rate shown at 4-hour intervals.

Commerzbank has also advocated adding to the position, or making the bet larger, if the Pound-to-Dollar rate falls to 1.2190, which is has done after briefly trading just below 1.2160 on the day, only to quickly begin paring losses. That latter recommendation suggests the current sell-off doesn't invalidate the crossing over of the above-referenced trendline and that ongoing weakness should be viewed as a buying opportunity. 

However, the bank also warns that the trend on a one-to-three month horizon remains negative and that it could eventually see Sterling return to 1.2108. That suggests the possible recovery touted on Wednesday will be a very short-term phenomenon that is ultimately followed by even more losses. 

"Only a rise above the June high at 1.2784 would indicate that a bottom is being formed (not favoured). Short term trend (1-3 weeks): Negative bias below 1.2763/72. Long term trend (1-3 months): Targets 1.2108, the 78.6% retracement of the move up from 2016. This is the last defence for the 1.1491 2016 low," Jones writes, in a morning briefing to clients. 

Above: Pound-to-Dollar rate shown at daily intervals.

"It’s not “as bad” as proroguing parliament completely but it’s reduced the time MPs had in October to block a no deal. For GBP to recover the fall this morning rebel anti-no deal MPs will have to get their acts together in the first weeks of September. No more delaying," says Jordan Rochester, a strategist at Nomura, of Johnson's move.

Some MPs from the governing Conservative Party had been conspiring with the opposition and members of other groups in order to prevent PM Johnson from taking the UK out of the EU without formal arrangements, which would severely damage his hand in negotiations aimed at getting the EU to agree changes to the withdrawal agreement struck with former PM Theresa May. Johnson is seeking those changes while claiming he'll leave without a deal if necessary, which could be economically damaging for not only the UK, but also the struggling Eurozone and ailing German economies.

The EU withdrawal agreement has a long list of serious flaws, according to its critics among both Brexit-supporting and anti-Brexit MPs, but most controversial of which is the so-called Northern Irish 'backstop'. Johnson is aiming at having it removed from the treaty because it could ultimately force lawmakers into choosing between a technical breakup of the UK or allowing all of the country to become trapped in the EU's legislative and regulatory orbit on a potentially indefinite basis without any influence or control over those things. 

"No-deal Brexit is looking ever more likely. GBP downside risks will continue to plague the market. It is only a matter of time until the recent GBP/USD low of 1.2015 is brought even lower. The MUFG base case no-deal Brexit assumption and our current year-end target of [GBPUSD] 1.1000 remain intact,” says Derek Halpenny, European head of global markets research at MUFG.

Above: Pound-to-Dollar rate shown at weekly intervals.

"The logic of the move makes sense to us. On one side, prorogation strengthens the government's negotiating hand with Brussels (though we have serious doubts that Brussels will "blink" anyway). On the other side, prorogation also allows the government to further accelerate its WTO Brexit planning," says Stephen Gallo, European head of FX strategy at BMO Capital Markets. 

BMO's Gallo said in February, when the Pound-Dollar rate was above 1.33 and at its highest for around a year, that he was making a "no deal Brexit by accident" and a fall all the way down to 1.21 in the Pound-to-Dollar rate his "base case" for this year. At the time, markets were clinging to the hope the UK would still either leave the EU with a withdrawal a agreement, while some analysts had speculated the country might not even leave at all.

He was certainly among the first, if not the first, to foresee repeated parliamentary failures to pass the EU withdrawal agreement followed by a gridlock that ultimately leads  the UK out of the EU without any withdrawal agreement. Now, Gallo has a new take on how the process is likely to evolve, which he forecasts will see the Pound-to-Dollar rate fall to 1.16 by the end of October and 1.15 by the end of January 2020. 

"Whereas before we were arguing that the next 1-2M would see 1) a no confidence motion leading to, 2) new elections and 3) a WTO Brexit, it now looks like the calculus will yield 1) prorogation, 2) a new parliamentary session, 3) a no confidence motion in mid-October, 4) Brexit on October 31 and 5) new elections in November," Gallo writes, in a briefing to clients Wednesday. 

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