GBP teeters on the edge

Towards the end of last year, Blondemoney attended a conference. The attendees were asked, what’s the big risk you’re worried about next year? 47% said Europe/EU elections; 26% said new US administration. Almost at the very bottom of the list, with just 2% of votes, was Brexit. At the time, that seemed complacent. Now, with Article 50 to be triggered in less than 11 weeks – and in fact with the trigger almost certainly a done deal – it seems downright dangerous to have forgotten about it. After all, GBP managed to shed several big figures in the day of the 7th October flash crash. There’s lots of chatter today about GBP/USD teetering on the edge of 30 year lows around 1.2090 – but then it managed to print below 1.1500 in a heartbeat on no news back then. The BOE are still trying to figure out what happened then…. perhaps by the time they issue the report GBP/USD will have already had a look towards parity! In any case, at some stage this year, with huge chunky and as-yet-misunderstood risks across the spectrum, it looks likely that a new all-time low in GBP is a scenario that needs to be on everyone’s radar.

At the moment, the short-term market is very short of GBP and keen to get shorter. Check out how GBP dipped yesterday on the mere announcement that Theresa May would be holding a speech next week on Brexit. That was good for 50 pts alone when it came out yesterday afternoon:

Cable 13 Jan 2017

Today’s turn higher can be attributed to those short-term guys taking some profits ahead of US holiday on Monday. But overall there is a sense that if GBP were to reach 1.25+ then it would be time to sell it again. Why are people waiting? Because of the worry that there’s no catalyst to plough new lows. The flash crash is written off as “bad liquidity in Asian time“; the better UK data since the Brexit vote is also upsetting the dynamic. Most of the market appear to be Remainers: as soon as the Government lost the first round of the court case that demanded recourse to Parliament before Article 50 is triggered, GBP rallied. There seems to be a desperation to cling onto hope of a ‘soft’ Brexit. As if ‘soft’ means anything at all. We don’t know what Brexit could/would/should look like, so how can we explain which is good/bad for the UK. Markets desperately want this to be a “cut-interest-rates-good / raise-interest-rates-bad” Snowballian kind of story. That makes it easier for them to quantify and understand. Indeed HSBC have even created a “Brexometer” to derive how hard/soft Brexit will be, based on the pound:

hsbc brexometer

oh dear oh dear. So, we take the pound lower if we fear hard Brexit and we can derive probabilities of a hard Brexit from a soft pound?

This is lunacy.

All we need to know is, can GBP go lower right now? Yes.

Will Theresa May tell all next week? No. Her speech is most likely just to ensure she wins the parliamentary and then House of Lords vote on Article 50. Which she will, or there will be riots on the streets.

Sounds like sell the rumour, buy the fact…

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