The Forex Chronicles

Brexit Continues To Create Uncertainty For GBP/USD Pair

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Brexit Problems

When the British public voted in favour of leaving the European Union back in June 2016, it caused shockwaves throughout the UK and the rest of Europe.

David Cameron obviously didn’t expect that more than 50% of the British public would vote to leave Europe, and I don’t think many other people did either, but it has happened and has actually resulted in one big mess.

Teresa May’s Conservative government is clinging on to power, with many arguments and disagreements continuing to rumble on within her own party, and now there is a fresh crisis after David Davis, the Brexit secretary who was essentially responsible for delivering Brexit, resigned in protest at her soft Brexit plans.

How Has Brexit Affected the GBP/USD Pair?

When the result of the referendum was announced just over two years ago, the impact that it had on the British pound was clear to see because it basically plummeted against all of the major currencies almost immediately.

Prior to the referendum, the GBP/USD, for example, was trading between 1.4 and 1.5, but following the vote it dropped to 1.3 within days, and continued to fall in the following months, dropping to around the 1.2 level at one point.

Since then, this pair has bounced back quite a lot, and was actually trading between 1.4 and 1.43 earlier this year, but because there is still so much uncertainty surrounding Brexit, it is now trading back in the 1.30s once again.

GBP/USD Price Chart Post-Brexit

The Major Problem

The major problem is that nobody really knows what is going to happen. No-one really knows if we will get a soft Brexit or a hard Brexit, both of which will affect the movement of the GBP/USD pair in different ways.

Indeed there is still a small chance that Brexit won’t actually happen at all because of the ongoing disagreements within the Conservative party.

Furthermore, if there is a snap election and Jeremy Corbyn’s Labour party gets voted in, we could well see a second referendum, and potentially an entirely different result, in which case the GBP/USD would almost certainly rocket higher as a result.

Future Direction of the GBP/USD Pair

As a result of all this uncertainty, the GBP/USD continues to trade in a sideways trading range with no clear direction, and this is likely to continue for the near future until we get a clearer idea of the Brexit exit deal.

So whilst there will always be opportunities to make money from short-term trading, it might be a good idea to remain on the sidelines for the foreseeable future if you are considering taking a long-term position on the GBP/USD pair.

There is always a chance that the price will surge higher or lower whenever there is a major development in the ongoing Brexit saga.

Plus with the government being plunged into crisis after crisis, there is the potential for some big price swings in the coming weeks and months, which could easily result in some big losses if you are caught on the wrong side.

The Effect Of ‘Brexit’ On The GBP/USD Pair

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When I last wrote about this pair back in October 2015, I mentioned at the time that this was at a critical point because a decisive break downwards through the trendline could potentially lead to a sustained move to the 1.46-1.48 area.

As it turned out, the price fell a lot further than that because the growing threat of a realistic withdrawal from the EU, annoyingly referred to as ‘Brexit’ by the British media, prompted it to fall to 1.3836 at one point.

At this moment in time, the bookmakers are quoting odds of 4/11 that voters will ultimately vote to remain in the EU, and odds of 2/1 that they will vote to leave the EU.

So based on the fact that bookies are usually correct on these matters, this would suggest that an exit is still highly unlikely, and the slight recovery of the British pound reflects this fact.

So where does the GBP/USD go from here?

Well the price is obviously going to be heavily influenced by Brexit over the coming months. For example, if Barack Obama and other major political figures voice their opinion and leading business figures continue to have their say, this may influence the opinion polls, which in turn could result in some big price swings leading up to the actual vote itself.

However it’s also worth taking a quick look at the GBP/USD price chart as well because from a purely technical perspective, this pair is trading in a pennant at the moment with converging trendlines, and therefore could be set for a decent breakout when the price moves out of this narrow trading pattern:

GBPUSD_March2016

A break upwards could see the price move towards the long-term 200-day exponential moving average at around 1.48, whilst a downwards breakout is likely to see the price test the recent lows and possibly drop a lot further.

Therefore it is worth paying attention to this pair in the coming days and weeks because there could be a decent trading opportunity at some point, particularly if the price breaks downwards because this will confirm the longer term trend.