GBP Plunges to Flash-Crash Low against Greenback
The Cable is Trading at Historic Lows with No Safety Net in Site
Currency traders are wasting no time shorting the beleaguered GBP. The sterling is now trading at 1.1989 to the USD, down 1.38% or $0.0167. The shock drop in the GBP comes hot on the heels of comments made by Prime Minister Theresa May to push for a Hard Brexit. The Sunday Times reported that the British Prime Minister would announce her plans to quit the European Union market this week.
Volatility with the GBP spiked with the announcement of Tuesday’s speech. This marks the first time since October 2016 that the GBP/USD pair is trading at such a low level. The Brexit referendum on June 23, 2016 was a resounding victory for the Brexiteers. By a margin of 52% – 48%, Britons voted to leave the European Union. Central to the decision were the issues of immigration and the rule of law. On both these issues, Britons want control to be vested in the United Kingdom and not in Brussels.
The Tenuous Dynamics of the UK-EU Relationship
The Brexit referendum is not a legally binding judgement on Parliament, but MPs and the Prime Minister have agreed to abide by the result. As such, the UK Prime Minister has announced plans for the UK to quit the EU. There are two approaches that can be adopted: A Soft Brexit and a Hard Brexit. It appears as if she has opted for the latter. This naturally brings tremendous volatility with it. Traders and investors are uncertain what political and economic frameworks will be in place if Britain suddenly quits the EU.
Nonetheless, Prime Minister May has indicated her desire to withdraw from the single market so that Britain can regain control of its borders and its legal system. Additionally, the PM noted that Britain would pursue trade agreements with other countries outside of the EU such as the US, Canada, Australia and others. Unfortunately, the GBP/USD pair has plunged approximately 19% since June 23, 2016. Currency traders are going short on the GBP/USD pair, with net put options dominating current trends.
What Effect will Theresa May’s Speech Have on Markets?
Any tough talk will naturally be received with bearish activity in currency markets. Theresa May has been particularly blunt about Brexit proceedings. Her approach has currency traders concerned about the future of the GBP. However, it is the anticipation of her speeches and announcements that drive currency movements. She will likely be able to assuage investor concerns and bring a semblance of stability back to the sterling. The Prime Minister has set a date of April 2017 for triggering Article 50 of the Lisbon Treaty.
The general perception among currency traders is that the sterling will hit lower lows against the greenback this week. Since the Prime Minister has taken over from David Cameron, her statements have had a negative effect on the GBP. The sterling dropped between 1% and 2% after her conference speech in September and her expectations vis-a-vis the Brexit in January. The pound is prone to wide-ranging movements in Asian trading sessions. Back in October, the GBP plunged 6% within minutes during the vaunted flash crash.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.