Brexit Looms, Fears Increase, BOE In The Wings
In light of recent events I feel it is timely for me to review the pound and pound-based trading pairs. The EU and UK negotiators announced a new Brexit deal just a day or two ago and in that time a serious rally in the pound hit a wall. On the one hand positive developments regarding the deal and a successful renegotiation have strengthened the pound. On the other, opposition in Parliament and a “buy the news sell the reality” mentality is setting in. Yes, a smooth Brexit will be good the UK economy and the pound but no, it is not likely to make a material difference in the UK’s economic outlook. Status quo will be maintained.
The status quo at this time is shaky economic fundamentals, slowing global growth, and expectation for central bank stimulus. The BOE is among those expected to cut rates, add stimulus, or at least come out in favor of economic support. The bad news for the BOE is that their next policy meeting is not until after the 10/31 Brexit Deadline and it is a 100% certainty the outcome of that event will sway their decision. Before that however, is the ECB meeting.
The ECB is slated to meet next week and also bears a high expectation to produce stimulus. The EUR/GBP has been in a downtrend the past few weeks and may go lower … if the ECB exceeds the markets expectations. The problem with the chart is that the new low is divergent from MACD and stochastic which is a signal I do not like to ignore. This divergence suggests there will be at least a rebound/retest of resistance that could take the pair up to the 0.88385 level. Add to this a bullish crossover in the stochastic and the odds of rebound over the next week increase. If the ECB fails to meet expectations I would expect a more substantial rally in this pair.
The GBP/USD chart is a near mirror-image of the EUR/GBD with one major difference. The MACD peak is convergent with the new high which suggests this rally may have legs. The FOMC is also expected to cut rates and that is what’s driving the move, the uncertainty stems from how much and when the committee will do so. It may be at the next meeting which is scheduled for 10/30, the day before the expected Brexit. A retest of 1.3000 is very possible, if not likely. A move above 1.3000 would be bullish and may take the pair up to 1.3600.