Why Is The Pound Still under Pressure?

Earlier this week, the British Pound strengthened against its currency counterparts with Theresa May’s speech. This was mainly due to the fact that the British Prime Minister decided that negotiations on BREXIT would be submitted to a Parliament vote. But the risks of a "hard BREXIT" are increasing. Why is the Pound still under pressure? What are the risks? What are the opportunities?

The British currency has lost nearly 20% since the referendum of the June 23, 2016 on the UK's membership with the European Union. On Monday, the British Pound even hit a low at 1.1983 against the US Dollar among increasing concerns of a "hard Brexit".

On Tuesday, Theresa May delivered a long-awaited speech on how she plans to conduct the BREXIT negotiations she wants to start before March 2017 – the date that she plans to activate Article 50. Without triggering Article 50, the UK is officially not allowed to start negotiations, which should last at least 2 years. To be able to trigger Article 50, one needs to settle a withdrawal agreement – or more commonly called: “the terms of the divorce”, such as the rights of European citizens living in the UK and the rights of the UK citizens living in the EU, how to allocate unspent funds that should be received or cross-border security arrangements.

Despite the clear break with the European Union wanted by May, the Sterling rose by more than 2.5% during the speech after the promise to submit the final agreement to the vote of Parliament. The increase is one of the first of this size since the financial crisis of 2008. The cable is trading under a strong resistance to 1.2430. Prices pulled back from this level on Tuesday and are now close to the moving average of the Bollinger Bands indicator. If the pair continues to go down, it could touch the support level at 1.21471. Conversely, it could also rise to 1.2430, and then 1.2726.

It’s important to mentione that Parliament will play an important role in the negotiations in order to get the best possible outcomes for the United Kingdom. This is a difficult and unprecedented situation with decisions that can have far-reaching consequences for the UK and its trading partners. To play a constructive role, Parliament should also be able to follow the negotiating objectives and comment on how negotiations are conducted.

Some investors believe that the fact there are some pro-European MPs (Members of Parliament) could "soften" the negotiations. Although May acknowledged that there would be concessions to be made, it was clear that "the United Kingdom can not continue to be part of the single market" and that "we will get control of the number of people coming to Britain from the EU". Remember that these are the two main themes of the campaign: trade and immigration. They will therefore be at the center of the negotiations.

The pair is currently trading on an upward trendline. If it bounces back from this line, the pair could go back to the resistance level at 0.88523. If it breaks through this trend line, it could go towards the supports at 0.86115 and 0.84892.

The European Union is the main trading partner of the United Kingdom, with 44% of exports of goods and services, and 53% of imports in 2015. Last year the government estimated that 3.3 million jobs were linked to exports from the United Kingdom to European countries. The value of the EUR/GBP pair has been strongly influenced since BREXIT in the view of the uncertain prospects of future relations between the UK and Europe. Of course, the degree of access to the Single Market in terms of goods, services, and people, as well as business regulations are raising concerns, especially for companies.

One thing is certain: "Brexit means Brexit".

There are still some grey areas that can strongly influence the British currency. Deutsche Bank believes that the British Pound could reach parity with the Euro. It will therefore be necessary to follow the evolution of the BREXIT negotiations to determine how these currencies will evolve and what opportunities they can bring for FOREX traders.