Pound falls on Brexit reports; GBPCHF and EURGBP at key levels

Summary:

• GBP drops across the board around lunchtime

• Falls come after reports May set to reject EU’s Irish border offer

• Possible inverse S-H-S for GBPCHF; EURGBP tests key support

We earlier noted that there had been a push higher in the pound following an unexpected rise n UK inflation, but these gains have since been reversed following some Brexit chatter. While inflation measured by CPI remains stubbornly above the BoE’s target of 2%, economic data is taking a back-seat for the foreseeable future as far as driving the pound is concerned with the ongoing Brexit negotiations a far more important factor.

On this front there have been several interesting developments today as UK PM May attends an informal 2-day meeting in Salzburg with the EU’s chief negotiator Michel Barnier, who himself said just yesterday that the bloc was planning a revised proposal on the Irish border issue. The swift swoon in sterling in recent trade came after reports from The Times newspaper that PM May is planning on rejecting an “improved” offer from the EU on the highly contentious issue of the Irish border.

GBPUSD rallied around 50 pips in 5 mins following the earlier CPI release but experienced a larger move of almost 90 pips in the 5 mins following the Time report on PM May rejecting the Irish border proposal. This highlights how Brexit rumours and speculation are a bigger driver for the pound at present than economic data. Source: xStation

The stakes are increasing as far as Brexit negotiations are concerned and the importance of the outcome can not be understated in terms of how key it will be to the future direction of sterling. For instance the Bank of America Merrill Lynch believe that a no-deal scenario would cause GBPUSD to plummet to 1.10 while Morgan Stanley recently noted that if a satisfactory deal is reached then the same pair could soar to 1.50. In the last hour UK Treasury minister Mel Stride has said there could be another referendum if the Chequers plan is rejected and it could well become a case of Brexiteers agreeing to PM May’s preferred plan for fear of another trip to the ballot box returning a different result.

While the GBPUSD is the most popular pair involving the pound both the GBPCHF and EURGBP may well be considered to be at better levels from a technical perspective with both potentially on the verge of a breakout should the GBP recover from this swoon.  

GBPCHF

This is currently the only pair where the GBP remains higher on the day and therefore could be seen to best placed for any GBP gains. An inverse head and shoulders may have formed over the past month or so with today’s break above 1.2705 seen as a potential entry signal. A daily close below 1.2705 would negate this setup while an intra-day drop beneath the low of the impulse candle at 1.2671 would also see this move deemed false. The profit target from a textbook perspective from this setup would come in around 1.2950. Also be aware that the SNB are set to unveil the outcome of their latest policy decision tomorrow morning.

An inverse head and shoulders could have formed on this pair which would target a push higher of almost 250 pips to 1.2950.  Source: xStation

EURGBP

Price is probing a potentially key support around 0.8865 which is where the confluence of a rising trendline from the April low and the bottom of the Ichimoku cloud are. Bulls have tried to defend this level in recent days but the long wicks above the last two daily candles (including the present) indicate selling pressure to rallies and a daily close below 0.8865 would open up the possibility of further declines.

EURGBP is testing potentially key support and a break below 0.8865 would open up the chance of a larger decline. Source: xStation