With media reports that Theresa May is to signal a willingness to opt for a “Hard Brexit”, as in she is willing to see the UK leave the single market, Customs union and ECJ, consequently market participants are expecting this to be a major negative for the pound.
Sunday evening trading is likely to see a knee jerk gap lower in Cable, GBP pairs and risk appetite, but what happens after that!?
We all know that May will want to get the best deal for the UK and that means playing hard ball to get the best terms of a deal, this could just be a negotiation tactic. Also, we all knew that a hard Brexit is a real possibility, so is it really that much of a shock. Even Phillip Hammond is threatening the EU that we will turn into a Singapore-style tax haven if we don’t get access to the single market.
What we could see happen is a kneejerk move lower in GBPUSD on Sunday, and then following the speech on Tuesday see a rebound in the pound, as traders sell the rumor and buy the fact.
There is also the possibility that GBP does its arse and flash crashes through to parity, so lets stay nimble here.
Anyway, best to look at the chart to identify levels/areas to watch.
Recently, 1.2110-1.2090 has been a support zone with GBPUSD unable to close beneath this area of support.
If we close below that support area we start to get into the “Hard Brexit Panic Zone” as I like to call it, this is where things will get wobbly and you could start to hear about central bank intervention and many different kinds of rumors to prop up the pound.
This “Hard Brexit Panic Zone” is 1.2040 – 1.1900 which is between the recent low and the flash crash low.
Close below this zone and all bets are off.
It’s worth keeping an open mind on the future movements of the pound. Stay nimble.