Pound wobbles ahead of Brexit showdown

June 20, 2018 09:52 AM

It has been a terrible trading week thus far for the British Pound, as domestic political risk haunted investor attraction towards the currency. There was a sense of uncertainty after the government suffered a crushing defeat earlier in the week in a Lords vote to give Parliament a “meaningful vote” on the final Brexit deal.

With the European Union Withdrawal Bill returning to the House of Commons today for a second vote, this could be a major leadership test for Prime Minister Theresa May. Another defeat for the government may spark fears over continued political uncertainty in the UK at a time where the Brexit deadline is slowly approaching. 

The outlook for sterling remains tilted to the downside, especially when factoring in how Brexit-related uncertainty and political risk may force the Bank of England to delay monetary policy normalization this summer.

Regarding the technical picture, the British pound/U.S. dollar (GBP/USD) currency pair continues to fulfill the prerequisites of a bearish trend on the daily charts. There have been consistently lower lows and lower highs since the middle of April 2018. The solid daily close below 1.3200 could inject bears with enough confidence to confront 1.3130 and 1.3100, respectively. With an appreciating dollar likely to compound to the GBP/USD’s downside, the outlook for the currency pair remains firmly bearish in the short to medium term.

Global stocks rebound but trade fears linger

Asian and European stocks rose today as markets attempted to shrug off trade war threats. While the improved risk appetite could elevate stock markets higher, the sustainability should be questioned as fears over trade tensions remain a key market theme. Global equity bears could transform the current rebound into a classical dead cat bounce if trade tensions between the United States and China continue to escalate.

Commodity spotlight: Gold

Gold has failed to garner any support from the lingering uncertainty and caution over the simmering trade tensions between the United States and China. Price action suggests that the yellow metal remains heavily pressured by a firmer dollar and prospects of higher U.S. interest rates. With the Federal Reserve expected to raise rates at least two more times in 2018, zero-yielding gold may find itself in trouble.

Taking a peek at the technicals, gold could be gearing for a heavy selloff on the daily and weekly charts. The $1,280 per oz. level has the ability to transform into a firm resistance that invites a steep decline towards $1264. In an alternative perspective, a rebound and daily close back above $1280 may reopen a path towards $1,289 and $1,300, respectively.

About the Author

Lukman Otunuga is an FXTM research analyst