There’s been so much said about a UK referendum on whether to remain a member of the EU and the corresponding moves in the pound. I imagine some of you are beginning to feel sick of hearing the word "Brexit" by now. So you would naturally think I would write about something else here today. Wrong.
The pound has been one of the worst performing currencies this year and is in danger of falling further as concerns grow about Britain’s future membership in the European Union. The risk of a Brexit should not be underestimated and the economic consequences could be severe. Even if the British public votes in favour of remaining in the EU on June 23, concerns about an exit leading up to the referendum could keep the pound under pressure.
Sterling has also been falling on the back of some dovish remarks from the Bank of England Governor Mark Carney and his MPC colleagues. So, unless UK data starts to improve now then it is difficult to see where the pound will find support from. Tomorrow, the ONS will release the second estimate of the UK fourth quarter GDP. Analysts do not expect to see a revision from the initial estimate of 0.5% growth, but we could be surprised.
But has the market overreacted to all this Brexit worries? After all, the referendum was going to happen anyway and it was inevitable that some top UK politicians would have favoured to join the "out" camp. So while Britain leaving the EU could be catastrophic for both the UK and European economies, the risks may well be overstated as I think the British public will ultimately vote to remain in the EU. For that reason I think the pound will recover strongly once the uncertainty is lifted. In fact, it is even possible the pound could stage a near-term bounce now that it is looking severely oversold on all time frames and against many major currencies. Tomorrow’s GDP data could be the excuse. That being said, I still expect the rallies to be short-lived while the Brexit uncertainty hangs over the markets.
As you may recall from my previous article on the GBP/NZD, we suggested that the cross could be on the verge of a breakdown when it was still holding comfortably above the 2.15 handle (see "GBP/NZD could drop significantly as BoE, RBNZ policy divergence grows," for more). As it turned out, the volatile currency cross did in fact break below that level before dropping for a time to below our main target of 2.10. While there’s scope for further losses towards the long-term 61.8% Fibonacci retracement of the entire 2013-15 upswing, at 2.0575, there is also a good possibility for an oversold bounce back towards the broken 2.1500-50 area. In fact, as the weekly chart shows, below, the 2.10 area had been significant resistance in the past and so it may well turn into strong support now. Given the heightened uncertainty, the bulls should proceed with extreme caution and treat any rallies in the pound as an oversold bounce. The bears meanwhile may wish to wait for their opportunities and confirmation before mauling the pound again: in this case, either a clean break below 1.10 or a pullback towards a key resistance level such as 2.1500/50.