In my last article on November 27th, I had stated that the British Pound (FXB) is in an utter state of confusion which will result in it trading in a box range formation. This proved to be true as the Sterling has been trading in a box range pattern which has resulted in it having price stagnation. However, the key question now is whether the Brexit deal will have a positive or negative impact on the Sterling in 2019. Thus, to establish the likelihood of all scenarios, I will look at the fundamental news affecting the currency, whilst, also analysing the chart using technical analysis tools.
The outlook of the British economy in 2019 is extremely poor as the GDP rate is expected to expand by a measly 1.3% to 1.4%. This is due to the Brexit related uncertainty weighing in on both the business investment levels and consumer spending. However, to counter this, the British government has announced that it will be raising spending levels, whilst, also introducing short term tax cuts. Nevertheless, I do not believe this will be enough to overcome the overall drag Brexit has on the economy. I say that as the British parliament is fiercely opposing the Brexit deal developed by Theresa May. Moreover, the ruling party is extremely divided as Prime Minister Theresa May just survived a no confidence vote from her own party. Hence, I expect this to worsen the value of the Sterling up until a deal is made on the Brexit issue.
However, if a deal were to be agreed upon by the British parliament then I believe this would cause a rise in the British Pound’s value. I say that as it would reduce the level of uncertainty in investors’ minds. Moreover, a deal will improve consumer spending levels as it will have support from the inflation level. This is as the inflation level is expected to stabilize around the target level of 2% if a deal were to be struck. Thus, if this occurs then it would give the British Pound a shove in the right direction. However, all of this may become a wishful dream if the Theresa May government fails to pass the Brexit agreement through parliament. This would result in the United Kingdom leaving the EU in either a no deal scenario or in a very disorderly fashion. This in turn would likely cause the Sterling to have a steep tumble.
A loss in GDP:
Source: Bank of England
If the Brexit deal does not pass through the British parliament then the United Kingdom will face a severe loss in its GDP. I say that as the Bank of England has estimated four baseline scenarios for the Brexit issue. The Bank of England expects that if a deal were to be made with the European Union then the relative loss to the GDP will be between -1.25% and -3.75%. However, if a no deal Brexit were to occur then the relative loss to the GDP will be around 10.5%. Thus, this is one of the reasons I believe the Sterling will be having some wild downward swings. This is as a loss to GDP is unavoidable in all scenarios which in turn will cause extreme volatility in the Sterling's value.
In 2019, I expect the British economic statistics to go in for a toss and I believe this is regardless of the United Kingdom having an orderly or a hard Brexit. I say this as the British economy will simply need some time to realign itself after it’s divorce with the European Union is concluded. Due to this, I expect the statistics to come in lower than analyst estimates in 2019.
The British Pound commenced 2018 on an extremely positive note as in January it’s value rose from 1.3557 to 1.4369. However, after this, the Sterling commenced a sharp descent which resulted in it losing approximately 13.2% of its value by December. This fall was largely due to the high level of uncertainty caused by the Brexit issue. Moreover, the bears were given a further boost as most British statistics came in below market expectations. A good example of this can be seen with the low level of manufacturing output seen throughout 2018. This is as the statistic was in the red for eight out of the prior 12 months. Moreover, the statistic also missed the market estimate for 9 months. Thus, due to poor statistics and a chaotic Brexit situation, the British Pound has had a painful 2018.
The currency’s weekly chart indicates that the Sterling is at a critical crossroad. I say this as the index is presently trading at a key candle resistance level at 1.2792. Moreover, the candle signals have been getting smaller which indicates that a big move is underway. The only issue is that we do not know whether the move is going to be on the upside or on the downside and this is all due to the Brexit factor.
The upside potential of the currency presently seems to be extremely low. This is as the Sterling is trading below its 20 and 50-day moving averages. Moreover, the 20-day moving average is acting a falling resistance line for the prior 12 weeks. However, if a bullish continuation were to occur, then I believe the Sterling would rise until the range between the 78.6% and 100% fibonacci resistance levels. The 78.6% fibonacci resistance level is at 1.2888, whilst the 100% fibonacci resistance level is at 1.2994. However, if the Sterling does breach the 100% fibonacci resistance level, then I do not expect the rise to go beyond the 127.2% fibonacci resistance level at 1.3218.
A downside move in the Sterling's value seems to be the more likely scenario in the coming weeks. This is as the Sterling is trading at a key candle resistance level at 1.2792. Moreover, I expect the failure of the Brexit deal in the British parliament to weigh in on the Sterling’s value. Thus, if there is a bearish reversal in the coming sessions, then I believe this will cause the Sterling's value to fall till the 100% to 127.2% fibonacci support levels. The 100% fibonacci support level is at 1.2643, whilst, the 127.2% fibonacci support level is at 1.2491. However, if the Sterling does breach the 127.2% fibonacci support level, then I do not expect the fall to go beyond the 161.8% Fibonacci support level at 1.2297.
The big picture:
Overall, I am leaning towards the bears ruling the first few months of 2019. This is as I believe the Brexit tensions will cause a drag on the Pound's value in the beginning of 2019. This is irrespective of how the other economic fundamentals perform. Thus, whichever way you decide to trade, do ensure that you utilize trailing stops, as this shall aid in capital preservation. Lastly, do read the future articles which will focus on the short term trading cycles of the British Pound against various other currency pairs.
Good luck trading.
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.