Pound and its correlation to Brexit

Updated: Sep 13, 2019

British Pound has been of interest to me since a number of years. It has always remained a strong currency. Recent times, specifically June 2016's Brexit (British Exit from the European Union) referendum, has impacted the Sterling significantly.

First oval in this daily chart for $GBPUSD depicts not so frequent move in a currency price. Usually on technical front, anything that moves up drastically has to come down and vice versa. However, for economic reasons that have long term impact, this downward move of Pound wasn't reciprocated by an equivalent upward move.

Price traversed sideways, fast forward few months and there was another hit to the Pound (depicted by second oval). Reasons of this were attributed, not to any global event / data or fundamentals, rather to an absence of margin floor limit on a high frequency trading algorithm (organisational presumably) that led to triggering of block trades short suddenly, taking price down in fraction of seconds. Since then, prices have recovered somewhat although within a range between 1.2780 and 1.1985 levels.

What next from here? There has been progress in UK Parliament approving of the official start of Brexit talks between the UK and the EU. British Prime Minister Theresa May is due to initiate Article 50 by end of March 2017, that would officially kick-off the Brexit process, anticipated to take around two years to complete. As we can all see lot of activity happening on a political front within the nation and that has a wider impact.

In terms of behaviour of Pound, will it further traverse range bound? or else further downside pull exists? It all depends on confidence of the team to initiate and implement its plan. Correlation with Stocks (mainly FTSE) depicting how these currency moves impact nation's companies and share prices is also something to keep in mind.