GBP: Difficult To Trade

Includes: FXB, GBB
by: Max Loh


Theresa May is trying to strike up a coalition with the DUC, which should give her a technical majority in parliament - but by a mere 2-seat margin.

As such, GBP-negative factors lie down the road for the currency, largely due to political and Brexit related reasons.

At the same time, rising inflation levels as well as an increasingly hawkish Bank of England make it difficult to initiate a short position on the GBP.

It is too difficult to trade the GBP at the moment. GBPUSD is currently trading around 1.2780, and headlines surrounding Theresa May's failed election campaign are dominating the media. Currently, Theresa May's Conservatives party is trying to strike up a partnership with the Democratic Unionist Party (DUC) prior to initiating Brexit negotiations with the EU slated for next week. Delays in the deal are expected due to the tragedy with Grenfell Towers in London which has understandably occupied Theresa May's time at the moment.

Such is the predicament GBP traders are facing that even if a deal with the DUC is clinched, it is uncertain whether that would give the GBP a boost or not. On the surface, a deal would give the Conservatives-DUC coalition a technical majority in parliament, which would on paper give Theresa May a stronger hand when initiating Brexit negotiations.

However, taking a closer look at the numbers, the Conservatives currently hold 318 seats in parliament, with 326 seats needed to enjoy a technical majority. A potential deal with DUC would boost the number of seats held by the Conservatives by a mere 10 seats, with the overall 328 seats held just 2 more than the 326 mark. That slim 2-seat safety margin is too close to comfort, and could lead to gridlock down the road, especially for more contentious issues. Of course, if a deal cannot be struck with the DUC, this would be a definite GBP-bearish event, as it would largely undermine Theresa May's bargaining power with the EU over Brexit.

Is it a good opportunity to go short on GBP then? No as well, which explains the predicament for GBP traders. This is largely due to the very strong inflation numbers coming out of the UK, as seen from the chart below. This is largely helped on by the very accommodative monetary policy established by the Bank of England, with interest rates at an unprecedented low of 0.25%. In this week's meeting, 3 out of 8 committee members voted to increase rates, in contrast with 1 out of 8 forecasted by analysts. A more hawkish monetary policy is required to quell inflation numbers, and the Bank of England may be forced to raise rates sooner than expected.

From a technical perspective, it is difficult to go short GBPUSD as well, with the currency pair trading right around the support area of 1.2750 as seen in the chart below. The currency pair had previously broken out of the 1.20-1.27 range, and price action is currently resting just above the top of the range.

In conclusion, it is easy to see many bearish factors lying ahead for the GBP, mostly political and Brexit related. At the same time, GBP traders will face the predicament of finding it difficult to find a good level to initiate a short position on the currency, largely due to an increasingly hawkish central bank as well as from a technical analysis point of view.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.