British Pound Stabilises As Brexit Could Be Delayed

 | Aug 15, 2016 06:50AM ET

Forex News and Events

Article 50 - The long goodbye?

Fears are increasing that the UK's separation from the EU may take quite a bit longer than anticipated. Indeed, insiders now claim that the UK is not ready for the negotiating stage of the exit and as a result Theresa May may postpone invoking the formal procedure, which was until now largely expected to happen in January 2017. As it currently stands, formal exit proceedings may only begin at the end of next year and last until Q4 2019.

Throughout the history of the EU, it has not been unknown for democratic decisions to be unobserved as was the case with the Lisbon Treaty in France in 2005, or in Greece last year with the OXO vote. It seems that there is a good vote and a bad vote. At the moment the only thing that is certain, is uncertainty. Currency-wise, we will soon see markets beginning to price in a likelihood of a Bremain, pushing the GBP/USD higher.

Summer Doldrums

Traders should brace themselves for a week of extremely unexciting, directionless trading. Alongside the general seasonality affecting markets, the lack of key data and ultra-loose monetary policy will make this week snooze-worthy. Global central banks action, punctuated by the BoE, has depressed volatility and removed the fear of uncertainty. The fact is best represented by the VIX shrinking to 11.83 - well below historical norms, while Bloomberg’s US Economic Policy uncertainty composites index surged to levels not seen since 2011. Bernanke’s “put” is clearly entrenched and gone global. Despite risk to outlook building, we don’t see any catalyst derailing the current risk-on environment, especially not this week ahead of Yellen speech in Jackson Hole (Aug 26th). Government bond yields continue to trend lower, especially in DM, which has only intensified the search for yields. Against this backdrop, USD should continue to trade lower against higher yielding EM currencies and range bound against G10. Investors have disregarded shaky fundamentals; diving head first into risky currencies likes BRL, PLN, ZAR and TRY. The highlight of this dull week should be US CPI, FOMC minutes and Fed member Lockhart’s speech as indicators for board members voting skew. From the UK, investors will get an additional view of economic activity post-Brexit with the release of CPI, the employment report and retail sales. With data pointing towards further monetary and fiscal easing, evidence that the consumer will bear the brunt of Brexit fears will only increase expectations for stimulus and send the GBP lower.

GBP/USD - Monitoring Downtrend Channel.