Those who traded yesterday’s consolidation in the GBP/USD had to struggle with volatile but choppy price swings, generating only losses ahead of today’s key event risk. Sterling traders are in the starting blocks for high volatility when U.K. Prime Minister Theresa May is scheduled to give a speech on the Brexit approach and we hope for more profitable trading opportunities today. May’s speech will be closely watched as it is designed to set out the government’s position and goals over the upcoming Brexit negotiations. Traders will look for any hints as to whether the U.K. will pursue a ‘hard’ or ‘soft’ Brexit. The market is currently pricing in a higher likelihood of a hard Brexit approach with the U.K. being likely to pull out of the European Union’s single market for goods and services. May will use her speech to explicitly say she expects the U.K. to leave the single market (hard Brexit), according to a person familiar with the matter. Given the fact that May is expected to be aiming for full separation from the EU, we expect the pound to remain under pressure. Pullbacks may therefore be an attractive opportunity to sell the pound at higher levels. However, we bear in mind that when market’s expectations are very high, there is a greater potential for disappointment and thus there is also a small chance of a short squeeze in the pound. In short, anything can happen today and we recommend traders to prepare for both bullish and bearish scenario even if the risk is to the downside.
PM May’s speech is scheduled for 11:45 UTC.
Until this morning, the pound traded sideways between 1.2085 and 1.1985 and the focus has therefore shifted to breakouts above or below this range. Bearing in mind that Monday’s gap was not yet closed, the pound might tend to test the 1.2170 area before falling back towards 1.1965. A significant break above 1.22 however, could send the pound toward 1.23. On the downside, the 1.1960-level needs to be broken in order to reinvigorate fresh bearish momentum.
Before May’s important speech we have the U.K. Consumer Price report scheduled for release at 9:30 UTC. Analysts are looking for an uptick in inflation while this report alone could help the pound strengthening in short-term time frames. With inflation being on the rise, the Bank of England could intend to raise interest rates in a next move, unless Brexit developments undermine the economy.
Trading in the EUR/USD was very quiet and none of our yesterday’s entries was triggered. Today, euro traders will watch the German ZEW Survey at 10:00 UTC, which could have a impact on the euro. The 1.0685-resistance area remains in focus and if the single currency climbs above that level we may see an extended upward move toward 1.07/1.0715.
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