GBP breakdown risks on painful wait for EU trade deal

Trade View 3 minutes to read

Medium Term / Sell

John Hardy

Head of FX Strategy

Summary:  GBPUSD is at risk of a push lower as the harsh reality of the post-Brexit landscape becomes clear and the UK is left with little negotiation leverage against the EU in seeking a free trade deal. The market is poorly positioned for a new, drawn out phase of negotiations.


Instrument: GBPUSD
Price Target: 1.2710
Market Price: 1.2965

Background:

Sterling has been on a "honeymoon" with investors since Boris Johnson won a strong mandate at the December election as it paved the way for a quick Brexit at the end of January. But now, the harsh reality is catching up with the market as we all realize that the hard nut for the EU and the UK to crack was not the terms of the Withdrawal Agreement, but the shape of the eventual trade deal after the transition period. Boris Johnson has taken a hard line in claiming that he will seek a free trade deal and will accomplish this by year end.

Sterling could fall considerably as investments into the UK will prove slow as business owners wait for a trade deal before acting and on fears that the EU will do what it can to squeeze the London financial services complex.

The Bank of England is behind the curve, meanwhile, in providing the struggling UK economy with support on its operating assumption that the bounce in confidence would be enough to pull the UK economy higher. BoE rate cuts are therefore likely in the pipeline this year.

Technically, note the recent lows around 1.2940 and 1.2905 as possible triggers for a further consolidation toward the 200-day moving average - just above which we place the profit target for this Trade View.

 

Parameters:

Entry: 1.2940-1.2975
Stop: 1.3040
Target: 1.2710
Time Horizon: One to two weeks

 

Source: Saxo Group
Source: Saxo Group
Management And Risk Description:

The risk here is that price action proves choppy and the market directionless as investors are unwilling to commit to a directional trade on GBP, or that negotiations take on a friendly tone far more quickly than we anticipate. 

In other words, the chief risk is that the direction is wrong and/or that risk parameters for the trade are too tight (stop levels, etc.).

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.