The GBP/USD currency pair has come under renewed attack, this time from within the UK. The latest comments from Prime Minister Theresa May about a ‘Hard Brexit’ have sent the GBP/USD pair reeling. That the GBP/USD pair is now trading below the key 1.20 level is deeply concerning, given the extreme volatility endured by the sterling since June 23, 2016. At the height of Brexit concerns, the GBP/USD pair plunged to a 31-year low, and the current level is testing that. This marks the first time that the sterling has plummeted to this level since the flash crash in October 2016. At that time, the GBP dropped 6% within minutes during an Asian trading session. The cause of the sudden crash remains a mystery, but current trends are equally concerning.
A Hard Brexit or a Soft Brexit? The UK Must Decide
Prime Minister May has signaled her intention to break with the European Union on multiple occasions. The Sunday Times reported that the Prime Minister will be holding a press conference to discuss Britain’s plan to leave the European Union. Her own timetable is drawing closer, with just 3 months left before she wishes to invoke Article 50 of the Lisbon Treaty. In the six months since the June 23 Brexit referendum, the sterling has plummeted 19% against the greenback, with further losses expected. The main driver of GBP volatility is the issue of a ‘Hard Brexit’. When Britons voted in favour of a break from the European Union, immigration and the rule of law were central in the decision. Now, the issue is how best to disentangle from the EU without disrupting UK and EU business enterprise.
GBP on the Back Foot as Politics Runs the Show
The Prime Minister is hard at work finding inventive ways of disentangling from the European Union so that Britain can regain control of its borders, jobs and lawmaking processes. The UK is also busy building new economic and political relationships with other nations to mitigate the negative effects of a Brexit. The GBP remains the worst performing G10 currency, and this trend is likely to continue as the Brexit takes shape. Every time Prime Minister May has spoken about the Brexit issue, the GBP has weakened. The sterling’s precipitous decline since the Brexit referendum has seen it fall from 1.48 to its current level of 1.199. Currency traders aren’t wasting any time – they are shorting the GBP/USD pair at every opportunity. The top binary options trading review experts have reported net put options on the GBP/USD, with more expected. The Cable is currently trading at its lowest level in 4 months. The pound has been on an extended downtrend for months, and there is no safety net to slow its fall.
Is a Flash Crash of the GBP/USD Pair Imminent?
The GBP is particularly sensitive to oversized fluctuations during Asian trading sessions. Recall the October flash crash that sent the GBP plunging 6% in mere minutes. At the time, the BIS (Bank for International Settlements) was unable to uncover the cause of the flash crash. However, those negative currency movements were largely attributed to poorly performing algorithms which exacerbated the downward trend. To better understand what is likely to happen with The Cable, we need to understand how the USD is performing.
The US dollar index is currently at 101, near its 1-year high of 103. Additionally, the small business sentiment index indicates that the majority of small businesses are optimistic about Donald Trump and the US economy in 2017. The consumer sentiment index will be an important indicator of US economic sentiment when it is released on Wednesday, 18 January 2017. Overall, strength is definitely with the dollar bulls. Fortunately for the UK, the Bank of England has been a steadying hand, and the Chancellor of the Exchequer is likely to ease market concerns and help to stabilise the pound.
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