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Brexit impact lighter than expected so far in 2018

Market Analysis

GBPUSD, H1

Brexit-related developments are likely to pick up with talks between the UK and EU on a transition deal are due to start, although negotiations on a future trading relationship are not due to begin until March. A transition period, which would see the UK remaining in the single market and customs union, but without voting rights, for at least two years after actual Brexit on 29th March 2019, is widely considered as being crucial in maintaining the confidence of businesses with long-term planning horizons, such as airlines, and to buy time to hammer out a new trade deal. The government still hasn’t made it crystal clear what type of Brexit it wants, whether a soft form (like the Norwegian or Swiss models) or a hard form (with a trade new deal, like Canada), although its language ostensibly points to a hard exit.

Both the UK and EU have also been making contingency plans for a scenario where Britain leaves without any deal, which is looking less likely since last months show of resolve behind the agreement on divorcing terms. The EU is aiming to have negotiations wrapped up by October, to allow time for ratification ahead of March 2019, though talks on new trading terms would likely spill well into the transition period. Aside from the obvious hurdle of 27 nations ratifying a new deal, the UK parliament will also vote on it. A vote against in the UK’s House of Commons, which some fear (including ex-UKUP leader Nigel Farrage), would inevitably spark a constitutional crisis that would trigger a new general election and/or a second referendum on EU membership.

Meanwhile, despite transition talks and  sudden referendum/elections risk , Cable carved out a fresh post-Brexit vote high of 1.3819 today, as the dollar weakens. The dollar has conspicuously failed to have been picked up despite decent fundamental leads, including Friday’s hotter than expected U.S. CPI data, and decent retail sales data, which were followed-up by relatively hawkish remarks from Fed member Rosengren, who said that he now favours more than three 25 bp rate hikes this year. Cable despite Brexit uncertainties, BoE’s Monetary Policy Committee meeting next week and recent Carillion collapsemanages to hold today above the 61.8 Fibonacci retracement of the Brexit sell off at 1.3720. More precisely, it is currently traded close to Daily R1 at the round level 1.3800, with a temporary weakness noticed earlier on Eurozone Trade release. However with R1 already broke once today,  the next resistance levels is back at  February’s 2016 support, at 1.3850 and at the R2 level, at 1.3870, based on the Daily Pivot analysis.

Hence with the significant December CPI data to be released tomorrow, the sterling remains well bid, with intra-day but long-term picture remaining positive. The pair is traded in the upper Bollinger Bands pattern in both 1-hour and 4-hour charts, while its Bollinger Bands are extending. Additionally ,the Momentum indicators are positively configurated, with positive MACD, RSI consolidating above 70 since Friday, and Stochastic holding above neutral.

Therefore, the pair presents further upwards momentum, with hourly support at 1.3720 and Daily support at PP level, which is at 1.3667. 

 

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Andria Pichidi

Market Analyst

HotForex

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