GBP/USD is not blowing smoke, yet

Time is now the biggest risk, as the UK moves closer to the original Brexit deadline
Chief Investment Office21 Jan 2019
Photo credit: AFP Photo

Used with permission from Bloomberg Finance LP, as of 21 January 2019.

The Bank of England’s (BOE) GBP effective exchange rate shows a nice bounce once the currency ratcheted to the 76.4% Fibonacci retracement support of the August 2017’s to April 2018’s price extremes of 74.56 to 81.24.

Effectively, GBP, on a trade-weighted index (TWI) basis, is nearing a key resistance test of 78.25 (so far reaching a high of 78.02). A break of the said level leaves more wiggle room for the upside (as indicated by the red oval) as it heads closer to the dropped-down resistance line drawn from the 81.24 peak.

A few options are now on the table:

  1. Acceptance of a “Plan B”. This is accompanied by an extension of Article 50 for a few months (Article 50 of the Treaty of Lisbon gives any EU member state the right to quit unilaterally, and must adhere to a two-year timeline – this has been invoked and hence the 29 March deadline).
  1. Calling a fresh referendum on Brexit. This initiative is backed by the Scottish National Party (SNP), the Liberal Democrats, Wale’s Plaid Cymru, and a smattering of both Conservative and Labour ministers of parliament (MPs). However, it does not have broad support.
  1. No Brexit or a “hard” Brexit – should any of these happen, the UK economy and its related assets markets would be severely impacted. There would also be a three-to-six month period of heightened uncertainty.
  1. A “Norway-plus” deal that would require the assent of all four members of the European Free Trade Association (EFTA). Under “Norway Plus”, the UK would depart the EU and embrace the EFTA to become the 31st member of the European Economic Area (EEA). The Norway-plus option allows the UK to retain full access to the single market and, most significantly, its policy approach to the services sector (that accounts for approximately 80% of the UK economy). This is the least “damaging” Brexit option.

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