The UK has dominated the headlines for all the wrong reasons over the past few days. From growing uncertainty over Brexit to rising Covid-19 cases and weakness in economic data. Yet, despite all this, the FTSE has managed to stage a nice recovery after falling sharply at the start of the week, as I reported earlier HERE
and the day before HERE
. The pound has weakened against the dollar, but its losses have been limited versus the euro, while against commodity dollars it has actually held its own relative well over the past couple of weeks. So, despite all the doom and gloom, the pound has not been completely battered.
Part of the reason behind sterling’s slight resilience in the face of the resurgent COVID cases in the UK is that the government has refused to re-introduce growth-chocking lockdown measures. Indeed, Foreign Secretary Dominic Raab has said the new measures are "balanced, targeted and proportionate" in response to criticism from some scientists who say that the measures don’t go anywhere near far enough. There has also been some positivity related to Brexit negotiations in recent days, although significant differences remain between the UK and EU. But if investors start believing that a break-through is forthcoming with time running out, then we will see a lot of short-covering which could lead to a big rally.
Indeed, there is a chance that sterling could make a comeback against the US dollar very soon, as it tests THIS key technical support area:
Source: ThinkMarkets and TradingView.com
In the above shaded region, we have several technical factors converging including old support/resistance levels, the 200-day moving average and 38.2% Fibonacci retracement against this year’s high. If the cable stages a rally from around current levels to form a hammer-like or another bullish-looking candle on the daily chart, this would be the signal the bulls may be waiting for. But for confirmation we will still need to see a higher high above Tuesday’s high of 1.2865 and ideally the 1.30 handle as well. If that happens, I will turn decisively bullish on the cable again. Otherwise, any rebounds will have to be taken with a pinch of salt, especially given concerns over a no-deal Brexit etc.
However, if the selling resumes later and price breaks to a new session low then in that case, 1.2575 could be the next big target for the sellers. This 1.2575 level was the base of the previous breakout, a level which was not re-tested on the daily following the move higher.
While there have been some positive talks, the government is still warning businesses against complacency as a no-deal Brexit is a real possibility. The British government is estimating that under the worst-case scenario, there could be up to 7,000 trucks waiting in queues in Kent
at the end of the year when the transition period ends. If correct, this would represent a large disruption to trade with the EU. Estimates also include a sharp reduction of up to 80% of freight between Dover and Calais. Meanwhile there is also an assessment that 70% of trucks may not be ready for the changes due to come at the end of the year. It is estimated that the disruption will build up in the first two weeks of the year and may last for up to 3 months or longer, depending on how rigorously the French government applies EU checks. The bluntness of the communication from Cabinet Office Minister, Michael Gove, is intended to force the transport industry to get ready for the change. Michael Gove wrote that: “The biggest potential cause of disruption are traders not being ready for controls implemented by EU Member States”. The effects of such dire forecasts coming to fruition will likely be the weakening of the pound against her major rivals. It will likely also include some stocks falling, especially of firms exposed to trade with the EU.
Meanwhile in other Brexit-related news, Bloomberg reports that JP Morgan
has decided to move $230B in assets from its offices in London to Germany due to the UK’s exit from the trade block. The $230B represents slightly less than 10% of JPMorgan’s total balance sheet. The bank is likely to move around 200 staff from London to Frankfurt. Brexit alone does not appear to be the only cause of these changes as the bank looks to expand market share in investment banking, corporate banking, and wealth management for the Frankfurt branch. Other banks have also made changes due to Brexit with some moving some staff and people to Ireland and other parts of the EU. If true, this Bloomberg story is an example of what economists had predicted years ago would happen post Brexit and now we are seeing some evidence of it. This is clearly not good for the domestic economy, especially if more financial services firms start moving their operations to mainland Europe in the coming years. The UK government must make sure that London retains its competitive edge for financial services, otherwise more will follow.