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
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.
Entry: 1.2940-1.2975
Stop: 1.3040
Target: 1.2710
Time Horizon: One to two weeks
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.).
The end of the road
Emboldened by surging crude oil prices, Saudi Arabia makes waves on the international stage, as Crown Prince Mohammed bin Salman manages to create a World Champions League, after buying the UEFA Champion League franchise.
As the world embraces GLP-1 obesity wonder drugs, the people next in line to get a prescription stop caring about dieting and exercising, figuring that the drug will later solve all of their weight-related health problems.
With the US budget deficit spiraling above 10% of the GDP, the government is desperate to foster demand for US Treasuries. Under intense pressure from the White House, Congress makes income from government bonds tax-free.
After a criminal group deploys the most deceptive AI deepfake ever seen, generative AI becomes a national security threat. With public distrust soaring, governments crack down with harsh new laws, puncturing the AI hype.
To fix the divergence in the global trade and financial system, the largest deficit countries unite to negotiate new world trade terms. For surplus countries, the reset of the global economic model is a painful adjustment.
As discontent with Biden and Trump rises to fever pitch, Robert F. Kennedy Jr sees his support rising inexorably in the polls. On November 5, Kennedy wins the US presidential election, ushering in a new era in US politics.
Stepping up Japan's economic transformation in 2024, PM Kishida brings in a host of populist policies to boost domestic demand. As the GDP growth rate hits 7%, the BoJ is forced to abandons its yield curve control policy.
As people wake up to how little tax Europe’s billionaires are actually paying, the EU Commission implements a wealth tax of 2%. The tax sends shockwaves through Europe's luxury industry, with luxury giant LVMH plunging 40%.
