Binary Brexit Stuns Sterling
Faraday Research | Dec 07, 2017 01:47PM ET
In the last week or so, sterling traders have been suffering through news overload with headlines aplenty on Brexit and UK politics. Euphoria on Monday sent cable near to this year’s highs as prices consolidated above 1.35. This was due to market expectations of sufficient progress being made in Brexit negotiations, which would allow progress toward phase two.
However the dwindling prospects of a deal ahead of next week’s EU summit have subsequently hit the pound. Stiff challenges remain from both the DUP and members of May’s cabinet with issues still surrounding the Irish border and post-Brexit regulatory arrangements. The clock is certainly ticking for May to come up with a solution before next Thursday’s summit.
‘Headline havoc’ is how one trading desk has labelled the current environment, which sums up perfectly how choppy sterling has become on an intra-day basis. In these circumstance, it is always prudent to take a step back and look at longer-term charts. In that light, one pair that has caught our eye, recently, is GBP/CHF.
We can see on the weekly chart that prices were stuck in a long-term range between 1.2000 and 1.3000. In the last few weeks, prices have consolidated tightly at the higher end of this range. However, there have been numerous attempts by bulls to break decisively higher but selling pressure has prevailed to push prices back. Interestingly, the 38% retracement of the November 2015 high to September 2016 low comes in around 1.3220.
Of course what particularly appeals to us is that periods of tight ranges and price consolidation are often followed by sessions of range expansion. On the daily candle chart, we can see November’s compression in finer detail. Indeed, over the last few days, we have had three consecutive ‘inside days,’ which followed on from a bearish engulfing candle – we note that periods of such intense price compression are rare. However, it is also significant that prices have tried to push above 1.3300 on numerous occasions now so we are wary of failed attempts to break higher- the well-known ‘fake-out.’
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Much of course depends currently on whether we get a concrete Brexit deal ahead of the EU summit. If we do, then GBP/CHF can head to new highs around 1.3500, which marks a previous swing low back in April 2016. Less positive news will potentially push the pair below previous resistance toward 1.3000 as Brexit becomes less binary, and more of the ‘hard’ variety.
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