The British Pound (GBP) posted heavy losses against the Dollar (USD) on Monday, as the Euro (EUR) also posted heavy losses.
A firm US Dollar did not help matters as Equity markets also struggled over fears around earnings growth.
Analysts at Lloyds are looking for 1.28 as key support, with the next level below that at 1.2500, though they do not rule out a bounce to 1.40 if 1.33 can be cleared.
As the week began with sharp losses in Equities, led lower by Apple after forecasts disappointed and generally the prospects for growth appear to be slowing for a number of large companies. Geopolitical concerns were the most prominent for Forex markets in Europe, as the British Pound and Euro were stark underperformers. The Euro to Dollar exchange rate (EUR/USD) and Pound to Dollar exchange rate (GBP/USD) were both hammered in the European session as Cable fell below 1.29 down just under 1% and Euro/Dollar was down 0.8%. The jitters in Sterling are probably down to (drumroll please), Brexit! Theresa May’s plans to avoid a no-deal Brexit are apparently close to collapse as EU officials are on the newswires talking about deadlock again and the hour gets short to get a deal done before Christmas and the lengthy Parliament recess which only returns in January next year. The Pound has been mostly trading in response to the rising or falling probability of a hard Brexit, and it appears at this time she is losing the support to get a deal done in Parliament even if she was able to get the actual opponents across the negotiationing table (the EU) to agree to such a deal. Whether it be Labour MPs across the aisle, the DUP members of her coalition or even Remainers and Brexiteers within her own party.
As the British Pound continues to accelerate to the downside, several key levels are now within range. Having been rejected above 1.30, selling pressure is heavy as the weaker Euro is proving to be a lead weight for the Pound as they fall in sympathy against a steady US Dollar. In their daily FX report analysts at Lloyds use language like “collapse” to describe the Pound’s move downwards,
“Once again the speed of change in sentiment and price is highlighted here, with the last three days seeing prices collapse back from the range highs. Momentum remains bearish, with support seen around 1.2800 ahead of the 1.2660 range lows.”
There is still a bullish storyline which could materialise for the Pound, but Lloyds once again note that there is hope if it could jump through 1.30, though 1.25 is on the cards if 1.2660 gives way in the near term,
“A rally back through 1.2935 and 1.3000 is needed to alleviate the current pressure. A decline through 1.2660 would risk further erosion towards next support in the 1.2590-1.2500 region.”
A longer term take on market conditions is apparently more positive for Cable, as Lloyds see the potential for a move above 1.40, an area that we haven’t seen since the Spring of this year when Brexit hopes were at a high,
“Medium term, the technical set-up is more constructive, but a move through 1.3320 is needed to open 1.35-1.37 and potentially the 1.40-1.44 regions again.”
The fact that the Australian Dollar and Japanese Yen were relatively steady against the USD suggests that a lot of the wobbles in EUR/USD and GBP/USD are Eurocentric. Italian budget woes and Brexit are proving to be some pretty significant headwinds for European FX, but the Dollar is not actually that strong.