The attention of the GBP/USD bulls to details indicates the unused potential of the pair

They say that a butterfly moving its wing in Africa can cause a hurricane in Florida. Looking at how the thumbs-up of Brexit secretary Dominic Raab caused the GBP/USD to grow by almost half a figure, one may begin to believe in the effect of small details on grand processes and phenomena. The pound continues to show heightened sensitivity to politics, and the question hovers over the market: how much did the referendum on Britain’s membership in the EU take out of its value? Can the sterling return to mid-2016 levels if London and Brussels shake hands before the end of November? Judging by the information that Teresa May was invited to continental Europe to read the final draft of the agreement, not long at all. However, the power in the Albion is not limited to government alone. There is also a parliament.

According to Aberdeen Standard Investments, the GBP/USD will soar to a mark of 1.5 within three months after the signing of an agreement between Britain and the EU. The deal will mean that in the next two years the country will be in the European Union on almost the same conditions, so why should the pound not return to the levels at which it traded before the referendum? If all this happens, a quarterly jump of 15% in the sterling will be the third one in history. The first two took place in 1987 and in 2008.

Quarterly dynamics of the pound

Source: Bloomberg.

In my opinion, talking about the level of 1.5 is too presumptuous. To achieve it, the efforts of both parties are needed, and in 2016, the US dollar looked somewhat weaker than it does now, because it did not have such serious drivers as the fiscal stimulus and the fast-growing US economy. Let's not forget that even if the British government agrees to the terms of a divorce with the EU, the document must go through the parliament. Its return for revision will put an end to all the efforts of London and Brussels and will create prerequisites for early elections or a repeated referendum. Not surprisingly, under these conditions, the one-month implied volatility of the pound soared to the highest levels since February.

Possible solutions to the political impasse of Britain

Source: Bloomberg.

Despite the success of the sterling, most speculators prefer to sit it out, fearing a sharp collapse of the GBP/USD in case of a negative decision of the parliament. They are well aware that nothing is agreed until everything is agreed.

We can't really say that the rally of the pound was due solely to political motives. Mark Carney made his contribution to the defeat of the bears, denoting a faster rate of normalization of the BoE’s monetary policy than the market had expected. In this regard, the release of data on the GDP of Britain for the third quarter scheduled for November 9 is able to make adjustments to the current balance of forces in the GBP/USD. Positive statistics will increase the risk of a breakthrough of the resistance at 1.3175-1.319 and give  the bulls some wiggle space. Disappointing data, on the contrary, will slow down the northern express. The question is, for how long?


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Price chart of GBPUSD in real time mode

Pound is hunting butterflies

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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