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Looking to the Futures

To Brexit or not to Brexit. That is the Question

Fundamentals:

The British Pound has certainly taken its lumps the past few years as ongoing concerns regarding Brexit, which began back in June of 2016, have weighed on the value of the Pound Sterling.

In the 3-years plus following the yes vote on the Brexit referendum, the Pound has fallen by over 20% vs. the U.S. Dollar trading just above the key 1.2000 level as of this writing.

Now if British Prime Minister (PM) Boris Johnson has his way, the UK will leave the EU on October 31 “deal” or “no deal”.

A “no deal” Brexit will be met with numerous uncertainties, with concerns already be voiced of potential shortages of needed items should no deal occur. 

While there has been market chatter that parliament may have some ability to prevent a “no-deal” exit and we have seen the Pound rally slightly off of multi- year lows on this belief, there is still significant doubt as to what will occur as the October 31 “deadline” grows closer.

This week could be key to market sentiment regarding the Pound as PM Johnson meets with French and German leaders later this week in his first meeting with key EU counterparts since being elected Prime Minister last month. The goal of these meetings is to hopefully re-start Brexit negotiations with EU leaders. It will be interesting to see if German and French officials are open to resume talks or will call Johnson on his willingness to leave the EU without a deal on October 31.

So we shall see how the market interprets this week’s talks and if we see a “relief” rally or market participants continue to “Pound” the UK currency below multi-year lows prior to the UK Summer Bank Holiday on Monday.    

Technicals:

Looking at the daily chart for the September 2019 British Pound futures (BPU19), we notice the market staging a recovery rally off of lows not seen since January 2017 when the lead moth futures traded within a tick of the 1.2000 price level.

To what extent of the recent recovery will last remains to be seen but there are several technical barriers that have to be overcome.

First, we have the 20-day moving average looming just above the 1.2200 price levels that has yet to be tested. Above this we have the previous lows at 1.2400 that supported the market until the steep sell-off on July 29 that set the stage for the current trading range. 

The most recent Commitment of Traders report shows both large and small speculative accounts net-short British Pound futures, with those participants categorized as asset managers and leveraged funds holding the bulk of the net-short position. 

This net-short position could be the catalyst for a short covering rally should we see a close above the 20-day moving average.

Momentum as measured by the 14-day RSI has moves out of oversold readings but remain at relatively weak levels near 36.00.

The recent low made on August 12 at 1.2033 looks to be near-term support for the September futures, with chart resistance seen at the July 31 high of 1.2277.     

 

Contract Specs: September 2019 British Pound Futures (BPU19)

Trading Calendar:

API Energy Stocks: 4:30 p.m. ET

Last Trading Day Futures: September Crude Oil

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