The resignation of Dominic Raab turned into another “Black Thursday” for the pound. The ex-secretary of Brexit said that the option that Theresa May agreed on with the EU to solve the Irish border issue threatens the territorial integrity of the United Kingdom, while the sterling lost about 2% of its value per day. Despite the support of the prime minister in the government, financial markets are skeptical about the possibility of passing the draft agreement with the European Union through the Parliament of Great Britain. This is reflected in the increase in the volatility of the sterling and the risks of a reversal to the highest levels since the summer of 2016. Investors’ demand for insurance, allowing them to save their positions in case the GBP/USD hits a peak of 1.2, is growing rapidly.
The dynamics of the volatility of the pound
Dynamics of risks of the pound’s reversal (differences in call and put options premiums)
The surge in volatility due to political chaos, which is fraught with early elections or a new referendum on Britain’s membership in the EU, made it possible to compare the pound with the currencies of developing countries. For example, the volatility of sterling quotes is higher than in the Brazilian real. There are rumors in the market that the dynamics of the GBP/USD is a kind of barometer of the future economic situation in Britain.
According to research by the Center for European Reform, if Great Britain had voted against parting with the European Union in 2016, its economy would have been 2.5% larger than it is now. A messy Brexit will change that figure to 8% by 2030. The Bank of England estimates that GDP slowed to 1.5% yoy, well below the record average (2.5%). Acceleration of inflation and the outflow of investment amid uncertainty have become the main scourge of Britain in 2016-2018. At the same time, the negative balance of its foreign trade under the influence of the devaluation has decreased, and unlike the German economy that has rolled into the red zone, the UK looks quite decent. The lowest unemployment rate in decades and soaring wages warm the heart of the local population, while the outflow of migrants threatens a further slowdown in GDP.
Thus, the most important events for the pound will be the EU summit in late November and the vote in the British Parliament in early December. Up to this point, rumors of a vote of no confidence in Theresa May, the resignation of ministers, as well as the dynamics of other currencies will rule the show. In particular, the closure of long positions on the US dollar against the background of the Fed representatives’ moderately “dovish” rhetoric provided “bulls” on the GBP/USD with no less support than the approval of the prime minister’s plan by the government. Markets are confident of a federal funds rate hike in December, but they reduced the chances of March and June, which leads to a correction in the USD index.
Technically, the update of the analyzed pair of October and August lows will increase the risks of implementing the AB=CD pattern. Its target for 161.8% is in close proximity to 1.22. However, it is not recommended to take any active actions before the GBP/USD leaves the triangle.
GBP/USD daily chart
The material has been provided by InstaForex Company – www.instaforex.com
Source:: The pound goes into clinch