“There are decades where nothing happens; and there are weeks where decades happen.”
With respect to the early 20th Century Soviet leader, pound traders no doubt feel like they’ve seen a decade’s worth of Brexit news crammed into just the first 24 hours of the trading week already!
The UK currency gapped higher to start the week after PM Theresa May’s “free trade area for goods” position was supported by the cabinet, including from Michael Gove who called it “realistic compromise.” Shortly after that, the currency turned lower on news that David Davis, the UK’s Brexit secretary, was resigning from May’s cabinet.
As my colleague Fawad Razaqzada noted earlier today though, the British pound/U.S. dollar (GBP/USD) had recovered to hit a nearly 1-month high this morning as traders reevaluated Davis’ departure as a sign that a “softer” Brexit may be in the offing. Just when traders had settled on that narrative as a bullish catalyst for cable, the market was rocked by news that Foreign Secretary Boris Johnson would also be resigning.
In essence, the departure of two key cabinet members in a 24-hour period has prompted pound traders to “sell first and ask questions later.” Now, the dominant market narrative centers on the tremendous uncertainty now surrounding the country’s political leadership and a looming conflict between hard and soft Brexiteers.
Just in the last hour, PM May has noted that preparations for a “no deal” scenario should be stepped up, which is about the last thing that sterling bulls want to hear. Meanwhile, oddsmakers have slashed the odds of another UK election from 5/1 to 6/4, with the odds of Theresa May being forced out as Prime Minister now dropping to just 2/1.
As of writing (though we wouldn’t be surprised to see things dramatically in the coming hours!), GBP/USD has collapsed by over 100 pips from its European session highs to trade back in the middle of last week’s range. For now, the pair is showing a large “dark cloud cover” pattern on the daily chart, signaling a possible near-term top and a failed breakout above previous resistance at 1.3315.
If we close around these levels, the next support level to watch will be the minor area of previous-resistance-turned-support around 1.3205. If that level gives way, bears may look to target the 10-month low at 1.3050 next. Meanwhile, only a recovery back above this morning’s high near 1.3360 would erase the near-term bearish bias.