More 'Severe' Downside Pressure on British Pound Possible, Johnson Hints at Early-2017 Brexit Negotiations

Brexit-related risk aversion will likely weigh on Pound Sterling over coming days but we note GBP/EUR and GBP/USD could be protected by major support levels.

• Pound to Euro exchange rate today (26/9/16): 1.1559
• Euro to Pound Sterling exchange rate today: 0.8652
• Pound to Dollar exchange rate today: 1.2974

Last week saw Sterling crowned the worst performer in the group of the world's 10 biggest currencies.

There was no obvious trigger behind the losses; something we have become used to of late and something that has frustrated commentators who like to report and discuss clearly identifiable triggers.

Rather, sentiment appears to be the issue with traders unwilling to expose themselves to a currency that will be the flogging-horse for any future disappointment related to impending Brexit negotiations.   

“Sterling remained in the defensive. Political uncertainty on the pace and the nature of the Brexit process sparked again investor uncertainty. This time comments from Foreign Secretary Boris Johson, that article 50 could be triggered early 2017 and that the exit process could take less than two year, added to sterling uncertainty,” says Piet Lammens at KBC Markets.

It appears January is sooner than markets assumed until now.

“GBP/USD shifted into reverse as Brexit risk returned to the fore, a wavering source of negativity for the pound. Boris Johnson, Britain’s foreign secretary, hinted that Britain could be on a somewhat faster track to exiting the European Union,” says Joe Manimbo at Western Union.

Manimbo points out that the market sees it as a negative for the Pound if Britain has a shorter timeframe to negotiate a favourable divorce deal with its EU counterparts.

Latest Pound/Euro Exchange Rates

	Live: 1.1391▼ -0.13% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1004 - 1.1049
**Independent Specialist	1.1232 - 1.1277 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Still, meaningful moves to the downside for GBPUSD could be held in check after a Bank of England official, Kristen Forbes, played down prospects of further rate cuts given the economy’s nascent resilience in the wake of Brexit.

If UK data holds up the Bank of England may have to hold back from cutting interest rates further, and this will certainly protect some of the key supports in GBP/USD and GBP/EUR.

We believe the Pound will struggle to maintain losses below 1.1520 against the Euro and 1.2880 against the US Dollar.

That said, these levels of support are fast coming into view and those hoping for a better GBP exchange rate best hope something swings sentiment over coming days.

Commentator Boris Schlossberg at BK Asset Management suggests the risks for further notable downside in Sterling this week has grown:

"With Europeans now seemingly eager to push UK to make a decision either way, the trigger of article 50 could happen sooner than PM May would like.

"The EU remains adamant about not negotiating any special deals with UK, in order to dissuade any other member from considering an exit from the union and there UK's negotiating position remains weak.

"For now the market is at wary standstill, but if currency traders begin to believe that Article 50 is imminent cable will see much more severe downside pressure."

Speculators Take a Brighter View of Sterling

Interestingly, the latest data from the CFTC on sentiment in the foreign exchange markets shows speculative investors turning more positive on Sterling.

The data, released on Friday, shows speculators took a more positive view of the GBP as Brexit fears eased; gross GBP long positioning rose sharply, suggesting bargain hunters stepping up activity.

Net GBP shorts were reduced by more than USD 2 bn in the week, taking the bear bet on the pound to the lowest since early July.

“Renewed pressure on sterling this week may see this trend reverse, however,” says a comment on the matter from Scotiabank.

Indeed, the latest CFTC data covers up to Tuesday September 20 & were released Friday September 23.

Therefore we will have to wait until the next Friday to assess what the most recent bout of GBP selling has had on overall sentiment.