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Pound tanks after Theresa May confirmation

Article by ForexTime

Temporary removal of Deutsche headlines supports equities

The financial markets have opened trading for the new week positively with risk appetite improving following the news in trading late last week that Deutsche Bank was on the verge of agreeing a reduced fine for misconduct. Germany is actually on a national holiday today meaning headlines over Deutsche Bank are also taking a break, however the end of concerns over the health of one of the largest investment institutions around the globe would also improve the sentiment towards the overall banking sector and reduce a massive risk to the stock markets.

Pound plummets after Article 50 confirmation from UK PM

The major headline over the weekend is the news that UK Prime Minister Theresa May has finally provided a timeline on when Article 50 will be invoked. The UK Prime Minister expects to invoke article 50 by March 2017, which has weakened the investor sentiment towards the British Pound and led to the Pound falling to its lowest level in nearly three months against the Dollar at 1.2844.

Investors are now pricing in further risk into the British Pound and although the GBPUSD has already fallen from 1.50 this year to 1.28, it needs to be pointed out that the downfall so far has largely been led by the unexpected EU referendum outcome and not the UK actually leaving the European Union. There is an anxious road ahead for the UK government as they prepare to take the turn towards exiting the European Union, which is why I personally believe the Pound will remain depressed for a prolonged period.

While the process of invoking article 50 and the negotiations with the European Union have previously been reported as needing to take two years, any signs that it will not take two years for the UK to leave the EU will likely lead to sharp reactions from investors.

I maintain my own view that the GBPUSD can realistically conclude the year between 1.20 and 1.25.

My reasoning for expecting further declines in the Pound is because so far, the outcome of the EU referendum is all that has been priced in and it can be compared to circumstances where a sentence has been declared by voters. The UK Government still needs to begin the process that voter’s want, which is to leave the European Union and the possible ramifications that this could have on investor sentiment. Right now all that has been priced into the Pound is the EU referendum outcome, the unknown of what will really happen with the EU exit is still ahead and does present risks for investors that they will need to take into account.

Be careful before pricing in further gains for Oil

The oil markets are continuing to move higher following the shocking news that OPEC came to a preliminary agreement to cut production output during their informal meeting last week. WTI Oil has gained around $4 in as many trading days to meet the $49 handle not seen since the middle of August. While the stronger price of oil has helped improve risk appetite and supported riskier assets, including emerging currencies, I do think investors need to think twice before being tempting into pricing in a further correction into the price of oil.

While it is positive that output is scheduled to fall by a reported 700,000 barrels a day, let’s not forget this needs to be officially confirmed in November and there is a heavy oversupply still present in the markets. It is also worth being mindful that some OPEC members are producing output at record levels and there needs to be an area of trust between the group to support the quota of production which will be confirmed in November.

Ultimately, Non-OPEC members would also need to compromise on production output to encourage a longer-term correction for the commodity.

I personally maintain the view since April 2016 that WTI Oil needs to successfully close above $51 in weekly trading before we can begin discussion over the price of oil concluding the year above $50. Until then, the level between $48.50 – $50 remains a potential selling zone that could lead to the commodity reversing its recent gains.

 

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.


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About Louie Lewis

Louie Lewis
Successful forex trading starts with you first. Then comes the actual strategies and techniques. I have been involved with forex and forex trading for a few years now. It is a wonderful way to build wealth. The learning never stops and I want to help others along their journey into this wonderful market of opportunity.

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