How To Solve The BREXIT Puzzle And Trade The Pound

Since the announcement of the UK determination to make a referendum concerning exiting the EU, the British Pound and European stocks starts to have disoriented effect and irrational movements. Trading GBP or any other correlated derivative became like playing 1000 pieces puzzle. You cannot combine every piece of article or comment, or event, unless you see the full picture. The British pound was depreciated, despite the fact of the strong UK data. While the FTSE100, CAC40, ESTX, and other stocks stayed volatile. This case was named the BREXIT crises by the media. This case took more than 2 years now and would still 2 more years. Between this and that, the traders are bleeding their money while trading the GBP or any other correlated pair. In this article I will list the BREXIT events, how it leads to the current prices, how to forecast the prices in the future.

2015-2016

All the time, the British government played it well, and used every possible mean to depreciate the pound. During the bre-BREXIT period a great talks about the side effects caused by the BREXIT, which helped the BOE to depreciate pound to the 2008 levels – during the financial crisis period-. This was accompanied volatile bearish FTSE100, and mixed volatile European stocks, while the US stocks barely affected.

BREXIT-Now

After the referendum result, the British pound tumbled to a fresh unprecedented historical support levels leaving behind a big uncovered gap for more than 6 months until now. On the other hand the FTSE100 soared shyly and the European stocks still volatile as a result of uncertainty and foggy scene caused by the British government. Technically, some indicators pointing towards the BOE fingerprints on that case by direct interference.

Current situation

The government cannot trigger the article 50 without an act of parliament to do so. That was the judgment of the Supreme Court. First instance judgment was consensus. To make it clear we must sum up the factors affecting the market situation right now, in order to organize the puzzle pieces, piece by piece to see the full picture clear.

  • British government continuous and contiguous attempts to deceive the market by issuing grey statements about BREXIT, especially previous four weeks. Past month Theresa May just before the markets opening, gave a brief statement by short period to leave the markets opening with a very big gaps by the opening. It was not a secret, that the British government was expecting that judgment. The British government did not spare an effort to depreciate the pound. David Davis secretary of state of exiting the EU played with words after the judgment ”as I already made it clear this judgment does not change the fact that the UK will be leaving the EU.”, ”our timetable for invoking the article 50 by the end of March still stands” the fact is that it is less than 2months to march. No way the house held a meeting and takes a decision within one months, it sounds a kind of joke. In addition, it is not expected to end that process before 2 years.
  • Scottish situation cannot be ignored. Scotland wants to negotiate directly with the EU without the custody of the UK as Nicola sturgeon (Scotland first minister) mentioned. Scotland has social and political interests for continuing within the EU, however the economic interests are the most important represented in the accessing of the Scottish companies and agriculture to the EU market. This will make a lot of pressure too in slowing down the British government.
  • Technical situation, the GBP get to historical support levels, FTSE100 got new historical resistances. The reason for that could be the strong momentum in the US markets. But that must lead us to the next point which is China. The oil has something to do here also.
  • China critics UK for the BREXIT, this is not our point. The point is the UK has sovereign bonds in RMB; also it is not a secret that China is the most creditors to the US economy. Now China is selling US treasuries to make some influence on the new US administration.

Technical outlook

The reason I made this scholar for is not my interest in trading the pound, but the vice versa. It is that I tried to trade everything but pound but I did not understand the freak price action for all other markets these days. After my research found technical reasons caused by the pound harming other markets, moreover; there are other fundamental factors affecting the pound (we recounted enough before). Now our focus is how the pound is influencing the markets and how to deal with it.

  • FTSE100 has a lot of uncovered gaps in both directions that did not affect pound pairs only or correlate ones, but all other currency pairs, stock and futures. If we took a look at the FTSE futures we will find the first gap (highlighted in blue) was in June 26th 2016 uncovered gap lower than the current price. Overreacting and the fear speculators caused the price to stuck higher for more than 7 months. Second gap was in January 3rd, 2017 over the price also was not covered until now. Third was in January 23rd, 2017 a bit under where we stand right now however; the price does not want to touch it.
FTSE Daily Chart
FTSE Daily Chart
  • European stocks side, you will find the major stocks were kept stagnate with no major move, with a solely bullish movement strait after the Federal Reserve raised the interest rate.

 

Cac 40 Daily Chart
Cac 40 Daily Chart
Dax Daily Chart
Dax Daily Chart

So we are in front of a fact saying that the FTSE may need to extend then retreat or the opposite in order to cover big gaps, specially that the rising trend is forming rising wedge accompanied by the opposite pattern in the GBP and propping volume. Since we know that it is not easy for a stock to correct itself, we belief that the arbitrator here will be the US stocks. On the US stocks view simply there are some people are buying, others are waiting for the first chance to sell – but not selling yet-. As a result I believe that the European stocks are going to be between the rising GBP and ongoing bullish US stocks.

  • GBP pairs pound the dilemma of this study; although, I can’t find something more interesting than the pound pair to trade. It is a very sensitive pair and not advised to be traded these days for moderate level of traders, however; if we could understand it we can gain of it. We have mentioned earlier the FTSE situation. Now it depends on what will happen in the US stretched stocks, and the pound will give a hand here. Pound technical are very prominent, they are giving us more than a signal of the coming bullishness.
  • Pound and Kiwi are pushing against each other. The Kiwi has pushed so hi after the CPI numbers that surprised everybody. But as seen it is just completing its rotation to start bearshing. When you check the next you will discover how the Kiwi is wedging in most of its pairs which will lead to bearshing sooner.

It reached 78.6 reteracemt and wedging ready to pull back.

EUR/NZD Weekly Chart
EUR/NZD Weekly Chart

The NZD/CAD pair is forming a rising wedge pattern in the weekly chart.

NZD/CAD Weekly Chart
NZD/CAD Weekly Chart

We believe that New Zealand dollar will be the most influential currency on the pound for the upcoming period. Pound was the most impacted currency by the soar NZD to push the pair towards the bottom of the retracement after it crossed the 127.1, which had failed to drop to the 161.8% for more than 3 months and now it is bouncing. Short term traders are predominanting the situation. On the short term the pair will rapidly rally to reach the 1.7400. If the pair continues to cross the 1.7940 –which is strong support and resistance at e same time- it go straight to the 1.9370 to cover the previous gap. We may recognize how much the two currencies are similar in forming the wedges which to big reversal patterns.

GBP/NZD Weekly Chart
GBP/NZD Weekly Chart
GBP/USD Weekly Chart
GBP/USD Weekly Chart

Thus we conclude

  • Political calendar is more important and influential than the economical one.
  • GBP is more likely to rally to cover the gap caused by the referendum result.
  • Once the gap covered we will have the chance to trade more stable market and set long confident strategies.

Published by

Mohamed Fathalla

Self-taught trader started trading and analyzing FX since the year 2000. Graduated from the law and economics school. Writing sophisticated analytical researches for different forex analysis web sites. The main trait of his writings is the simplicity by gathering all fundamental, technical and political factors in a simple shape, thorough which the normal trader can make a clear decision upon one comprehensive analysis. He joined the Fxempire.com team in 2017. Now he is working on developing a new fundamental indictor [MFI]. The main idea of this indicator is to give a clear indication for a specific currency strength or weakness before other currencies from the fundamental perspective.