Sterling slides on Theresa effect

January 16, 2017 08:26 AM

The heightened hard Brexit fears have triggered a steep Sterling selloff during the early trading hours of Monday with the British pound/U.S. dollar (GBP/USD) currency pair tumbling to a fresh three-month low at $1.1983. Although the cause behind the renewed selling pressures on the Pound was attributed to reports of Theresa May standing firm and moving forward with her hard Brexit plans during Tuesday's pending speech, the frightening low buying sentiment continues to play a critical part. It is becoming quite clear that the persistent Brexit woes and ongoing uncertainty have left the Pound vulnerable to extreme losses with anxiety over a rigid divorce from the European Union exposing the currency to further downside risks in the future.

Sterling bears have received ample inspiration from the visible lack of clarity the UK government has provided on the Brexit steps and this continues to grate on investor sentiment. With fears on the rise over a tougher European Union exit negatively impacting the UK economy, the rising risk aversion, and diminishing buying sentiment may ensure Sterling remains depressed this month. While most anticipate May to provide some clarity on Tuesday on how the UK plans to move forward with the hard Brexit scenario, there is a threat of the Sterling sinking deeper into the abyss if investors are left empty-handed instead.

If this messy Brexit episode explodes out of control this quarter, there is a possibility of the Bank of England adopting a dovish stance which may spark a divergence in monetary policy between the Fed and BoE. As of now, Sterling weakness remains a recurrent theme with sellers exploiting the technical bounces to drag prices lower. Technical traders may observe how the GBP/USD reacts to the 1.2150 dynamic support which has the ability to transform into a resistance if the selling momentum persists.

Dollar attempts to stabilize 

The lingering impacts of last week’s market shaking dollar selloff can still be seen on the Dollar Index with prices hovering around 101.65 as of writing. Dollar bullish investors have lost their inspiration to propel the Greenback higher following the lack of clarity on fiscal policies at Trump's news conference. With the initial driver behind the dollar’s appreciation pinned on the hopes of Trump boosting U.S. growth via fiscal spending, this new cloud of uncertainty could obstruct the Dollar’s upside gains in the short term. The next major event risk for the Greenback this week will be Trump’s inauguration ceremony on the 20th which could cause price sensitivity to intensify as anxious investors are kept on edge.

Commodity spotlight: Gold 

The rising Trump fueled uncertainty, persistent Brexit woes and a weak dollar have elevated gold prices closer to $1,210 per ounce during trading on Monday. This yellow metal has unexpectedly regained its safe-haven glimmer in the first trading month of the New Year with further gains expected in the short term if uncertainty becomes a dominant theme. With anxiety and risk aversion set to heighten this week ahead of the inauguration ceremony in the United States, investors may flock to safe-haven assets which should keep Gold buoyed. From a technical standpoint, Gold could explode into further gains toward $1,230 if bulls manage to conquer the $1,210 resistance level.

About the Author

Lukman Otunuga is an FXTM research analyst