Brexit risk hammers British pound

Sterling looks precarious

The US dollar gave ground as equities rallied initially on Wall Street overnight. Still, a turn in that market quickly saw the dollar recoup losses, with the dollar index finishing 0.12% higher at 93.35. Asian markets have a decided Friday look about them, with the rise in US equity futures pushing the greenback slightly lower against the G-10 and regional Asian currencies.

The euro rallied to its 1.1920 overnight but gave all those gains back to finish unchanged at 1.1810. The balance of risks now shifts to a test of support at 1.1750 and 1.1700, especially if the equity rally runs out of steam in New York this afternoon. A daily close below 1.1700 sets up a possible correction lower that has the potential to run as far as 1.1400 to 1.1500. EUR/USD needs a daily close above 1.2020 resistance to confirm its longer-term appreciation is back on track.

The evening’s big mover was the British pound. GBP/USD fell 1.50% to 1.2805 as the European Union threatened legal action over the UK’s intention to rewrite parts of the Brexit agreement with Europe unilaterally. The UK’s actions now leave the post-Brexit talks that were already in trouble, in limbo. EUR/GBP rode 1.65% overnight, breaking out of its three-month range. Further gains could potentially target 0.9500 if the standoff continues.

With currency markets having to chase their tails and reprice long-forgotten Brexit risk, sterling now finds itself in dangerous territory. The fall overnight to 1.2805 broke 6-month trendline support at 1.2880 which now becomes resistance. It leaves GBP/USD perilously closely to critical support formed by its 100 and 200-day moving averages (DMA) at 1.2690 and 1.2735, respectively. A loss of this crucial support zone will signal much deeper losses for sterling in the weeks ahead.

Sterling aside, currency markets are trading in a directionless manner, content to follow the nuances of equity markets for now.

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 Market Analyst - Asia Pacific
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is OANDA’s senior market analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV, Channel News Asia and the New York Times. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley