GBP: No Braveheart Rally to Sterling’s Rescue

The GBP rally after Scotland’s independence referendum announcement appears to be over, with the Brexit Bill due to gain Royal ascent today. But was it really ever news?

Reality has met hope this morning, as early Europe and London have walked in and sold GBP from 1.2200 down to 1.2150 in short order. In the process completing the complete unwind of the rather optimistic dead cat rally in GBP after Scotland’s First Minister announced her intention to hold a 2nd independence referendum in late 2018. As ever, people have looked at the headline and reacted, rather than digging a little deeper. Taking a politician at face value is usually not a good idea….(more on this below)

Today should be a momentous day for the United Kingdom, as the freshly minted and unamended Brexit Bill will pass to the Queen for Her Majestie’s royal approval and then pass into law. Prime Minister May should then be free to trigger a formal Brexit announcement at any time from later today. The press now seems to believe this is a more likely now at the end of the month rather than this week having been blindsided by those pesky rebellious Scots North of the border.

We’ll come back to GBP in a moment, but I feel it is necessary first to bring some hard reality to those GBP bulls out there who think Scotland’s actions will either derail Brexit or actually make economic sense. I will add I have no particular opinion on it, either way, other than Ms Sturgeon’s somewhat cynical timing. Starting from the top

  1. Scotland’s Parliament must agree to hold a referendum in the first place. The Scottish National Party is a minority government, so this isn’t a done deal.
  2. Scotland must then enact a Section 30 asking Westminster’s Parliament for permission to have the referendum. PM May has already said this won’t happen until Brexit is completed.
  3. Scotland takes GBP 128 from London for every GBP 100 it puts in as tax.
  4. Scotland’s books won’t balance with the price of oil at $50.00.
  5. Scotland would be outside of both the United Kingdom AND the European Union. Scotland would then have to apply for EU membership and the multi-year process this entails.
  6. Countries within the EU with separatist movements, such as Spain with the Basque’s and the French with those unruly Corsicans, are unlikely to want to set “a precedent.”

Given the above, it is hard to see any basis for a GBP rally in all honesty. Europe seems to agree (at last on something!) and has sold the Braveheart rally accordingly to start the day. With so much event risk this week and “Big Wednesday” to come tomorrow, there is a chance that GBP could end up being swamped by the noise of the FOMC.

Reality is biting that Brexit really is upon us and from a technical perspective GBP could look a bit vulnerable in the short term.

Looking at the four-hour chart gives us the clearest short-term picture,

GBP has support at 1.2130 (breaking as I write), with clear air below until the January 16th low at 1.1985. Below here, life could get intriguing for GBP.

Resistance is clearly marked at yesterday’s high of 1.2250 and then the 1.2300 regions.

GBP Four Hourly

With all the political and economic risk coming up in the next 48 hours, GBP’s price action could well be choppy between the upper and lower of the support and resistance levels. What GBP shouldn’t expect help from, is a Scottish Braveheart driven rally which is a noisy paper tiger.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

Jeffrey Halley

Senior Currency Analyst
Based in Singapore, Jeffrey has over 25 years experience in the financial markets, having traded currencies, options, precious metals and futures. Jeffrey started his career at Barclays Bank in New Zealand. However he has spent most of it in London and Asia.Jeffrey focuses on the Asia time zone across asset classes. A regular commentator on business news TV and Radio, he is originally from New Zealand and holds an MBA from Cass Business School, London.