09:46, 06 December

Receiving Much Needed Support at 1.27 as BOE Comments Further on Brexit

For the last several weeks, the market has seen a reasonably volatile GBPUSD ease lower from its then three week high near 1.32 earlier last month down to an 18 month low below 1.27 in the last couple of days. In doing so it has firmly established the 1.27 level as a key support level as the currency pair has enjoyed considerable support from this level on several occasions in the last few months and is receiving much needed support from it presently. Should the GBPUSD drop through the support at this level, then it could fall considerably further with no obvious support levels nearby. The other key level presently is 1.3250 which has repeatedly fended off the currency pair’s attempts to move higher, although this remains some distance away.

Around mid-August the GBPUSD also rallied well which saw it regain lost ground from a 15 month low below 1.27, before reversing strongly again at 1.3050. Throughout July the GBPUSD was content to trade in a very small range right around the 1.31 level. It was also feeling some selling pressure from the resistance level at 1.32. The 1.30 level that provided strong support to the GBPUSD and was a key level throughout 2017 seems to have lost its significance as the 1.3050 is more relevant presently.

Throughout most of May the GBPUSD dropped dramatically from the resistance level around 1.43 down to the 1.32 level. The 1.36 level provided some resistance to the sterling in the last nine months or so and providing a little bit of support, except the GBPUSD continued lower through this level. Earlier this year we were looking at the resistance level at 1.43 looming like a dark cloud in the distance ready to strike. Several times this year the resistance around that level stood firm and sellers jumped all over the GBPUSD forcing it down to several lows. Interestingly, despite all the aggressive selling it wasn’t so long ago the GBPUSD hit a two year high above 1.43.

Earlier this week Bank of England (BOE) Governor Mark Carney and other top officials from the central bank addressed the Treasury Committee about the BOE's recent report on the potential economic impact of Brexit on Britain.  In that assessment, the BOE suggested that Britain risks suffering an even bigger hit to its economy than during the global financial crisis 10 years ago if it leaves the European Union in a worst-case Brexit scenario in four months' time.  Deputy Governor Ben Broadbent commented specifically on the GBPUSD, saying, “The fall (in sterling) since the referendum represents the market’s view on a range of possible outcomes. And essentially the larger the effect on UK trade, the UK exit, the further the sterling is likely to fall, for various reasons. So at the moment what is ‘priced in’ to the level of the exchange rate is a number of possible outcomes.  So if the eventual exit is towards the better end of that range, you would expect sterling to rise from here, if it’s towards the worse end of that range, you would expect it to fall further. And generally, the greater the economic dislocation, the worse the exchange rate is going to be, there’s a direct relationship.”