Originally published by AxiTrader
After the pound came under pressure in Asia on Monday it seems the UK government has decided the best course of action is to give the press a detailed background of what prime minister Theresa May's plan for Brexit is before her speech to allow markets plenty of time to digest the details.
What's clear is that May is keeping to the spirit of what the referendum delivered with its determination that Britain is to leave the European Union.
Not for Mrs May is a half in, half out United Kingdom. Rather see is set to outline a hard-Brexit where the UK disengages from Europe as a member of the EU and its institutions.
The UK Telegraph reports May will say:
We seek a new and equal partnership – between an independent, self-governing, Global Britain and our friends and allies in the EU.
Not partial membership of the European Union, associate membership of the European Union, or anything that leaves us half-in, half-out. We do not seek to adopt a model already enjoyed by other countries. We do not seek to hold on to bits of membership as we leave.
The United Kingdom is leaving the European Union. My job is to get the right deal for Britain as we do.
That sounds like the very definition of a "hard" Brexit.
Yet sterling is hardly moved this morning and GBP/USD remains above 1.20 and off the lows of the week. Perhaps traders are hopeful that they will receive some certainty and clarity around the process from prime minister may's speech.
Certainly that appears to be something that May will deliver to UK citizens and markets with her speech tonight.
Again, via the Telegraph:
Mrs May has pledged to trigger Article 50, which triggers formal Brexit negotiations with Brussels, by the end of March.
The four principles guiding the negotiation with Brussels will be “certainty and clarity”, “a stronger Britain”, “a fairer Britain” and “a truly Global Britain”, Mrs May will say.
She will say that the Government has “12 objectives that amount to one big goal: a new, positive and constructive partnership between Britain and the European Union
The paper went on to say that the 12 objectives include "gaining control of Britain’s borders, taking the UK out of the jurisdiction of the European courts, preserving the Union, maintaining workers’ rights and signing major free trade deals".
Already yesterday US president-elect Donald Trump said he was open to a bi-lateral trade deal with the UK.
So maybe the sterling's relative strength - all things considered - reflects the positive aspects of Brexit and the reduction of uncertainty that it seems PM May will deliver in her speech tonight.
Maybe.
There is still much water to flow under the bridge - something BoE governor Mark Carney highlighted in a speech overnight when he said that leaving the EU has the potential to reinforce existing risks facing the UK. But in many ways that's supportive of the UK and of Sterling because while risks remain things have not been anywhere near as bad as many Brexit doomsayers forecast before and in the immediate aftermath of the vote to leave the EU.
As I have noted before the big fall in the pound - remember it traded 1.50 against the US dollar and around 0.76 in EUR/GBP terms on referendum day - has been an important shock absorber for the economy. And yes the UK runs a big current account deficit so a weaker pound is problematic.
But last night the IMF upgraded the economic outlook for the UK where it said " domestic demand held up better than expected in the aftermath of the Brexit vote."
Now 1.5% growth in 2017 is far from exciting or strong. But it is 0.4% better than the IMF's previous forecast. many other economists and investors are likely to have made upward recalibrations to their outlook as well.
So what's next for GBP and EURGBP rates - among others - depends as much on market positioning and the natural bearishness of traders and investors in the face of Brexit as it does on economic data.
When I look at the GBP/USD chart my view hasn't changed from yesterday;
1.1825, the October low, is the key. A test is not out of the question. Traders might try and buy that dip. But if it breaks targets of 1.15 and 1.12 would likely get a solid airing in chat and the press. But 1.1825 would have to break first.
While it holds I find myself unable to be overly bearish.
In EURGBP terms the technical set up is more interesting but with less obvious a pressure point to drive a renewed wave of buying euro and selling the pound.
The key short-term level is yesterday's high around 0.8850 and then 0.89 which is the 61.8% retracement of the late 2016 fall to what has become a fairly solid base around 0.83 for EURGBP since Brexit. A breach of 0.89 would open the way toward a full round trip back to the October high of 0.9300 ish.
For me 0.89 and 1.1800/25 are the key levels in both these pairs to watch. A breach could signal a much bigger move.
But as always unless or until they break they remain import levels of resistance and support in EURGBP and GBPUSD.