Trading the British pound around the Brexit outcome

With less than 200 days left for the United Kingdom to leave the EU, Michel Barnier - EU's chief Brexit negotiator - heads to Salzburg to meet the EU's 27 in what many believe to be the most important meeting since the start of this whole Brexit saga.

The purpose this informal

meeting serves is to bolster Theresa May's Chequers deal - which is currently

opposed by 80 conservative MPs - by discussing two things: first, whether to

issue new instructions to Mr. Barnier that would allow him to reach a deal with

Mrs. May and second, to agree on the specifics of Mr. Barnier's updated instructions,

if issued, that would serve as a sort of mandate to any deal.

Side note on Chequers:

Theresa May's plan for a goods-only single market access, that has led to several ministerial resignations and has been compared to a "suicide vest", is threatened to be voted against by 80 Tory MPs.

However, it is still considered by most to be better than a "No Deal" Brexit. As such, PM May is still pushing hard for her Chequers proposal as she instructed every cabinet member to tour the country, before the conservative party conference this month, selling Chequers to her divided party as the only deal on the table.

Back to our subject:

Economic figures improving across the board have allowed the pound to hold its ground against its peers, setting expectations for higher price prints. As for BoE meeting this week we can safely say that the market has already priced in a "no hike" in interest rates as Governor Carney said: "market expectations of a further 25 basis point rate rise at least once a year for the next few years was a reasonable rule of thumb".

The BoE raised interest rates by 25 basis points last month and the next rate hike is not expected before the UK leaves the EU on March 29th next year.

The Sterling surged above 1.30 against the Dollar as the market reacted to Mr. Barnier's optimism when he insisted that it is realistic to hope for a Brexit divorce deal that can be sealed within six to eight weeks. This was shortly followed by PM May's spokeswoman who stated that her focus is on securing a Brexit Deal in October.

Judging on the latest price action, the market seems to be in a "buy the rumor and sell the news" mode, where all the fundamentally problematic issues regarding a clean Brexit have been disregarded in favor of the recently founded optimism. This behavior goes hand in hand with the reasoning that investors have been pricing in a "cliff edge" Brexit prospect for more than 2 years and now the bulls are rushing in on the slightest amount of good news.

Where to from here?

Well, at least we can identify some limits closer than the sky! We will discuss two scenarios: A favorable short-term scenario for the pound in the wake of the Salzburg meeting, and a worst case long term scenario - in case of any sudden reports of a no deal Brexit becoming more likely.

The first scenario: if bullish momentum continues in the days leading to the meeting, Cable should breach the 1.31 level opening the door for higher prints of 1.33 and 1.3380. If the market corrects before the meeting, then the pound's upside potential will diminish but we still may see an upwards move towards 1.3150.

The second scenario: if the pound drops from here, maybe due to a "revolt" inside May's administration from Brexit hardliners or a sudden collapse of negotiations, then the 1.618 Fibonacci extension at 1.2115 is to be used as the first support level. This is where the Pound collapsed after the Brexit referendum results and a catastrophic, no deal scenario may even drive prices to 1.0320 in the long term.

This article was submitted by ADSS.