The British pound posted an impressive 3% gain on a single day on Tuesday since the financial crisis, erasing most of the declines in the previous weeks on just one day. Overall, the British pound rose by nearly two cents against the U.S. dollar towards $1.2400 as Britain’s PM Theresa May offered some clarity on Brexit nearly seven months after the UK voted to leave the EU. EURGBP, at the heart of the Brexit, fell 1.88% on the day, closing at £0.8627.
EURGBP, Tuesday, January 17th, 2016
The British pound has been vulnerable to the Brexit headlines in the past weeks, especially after the UK government got embroiled in the Supreme Court hearing on Brexit. On Tuesday, the Prime Minister put speculation to rest as she maintained that the Brexit deal would be put to a parliamentary vote, re-assuring one and all that the Brexit deal will be thoroughly discussed by lawmakers first.
Ms. May also outlined a set of priorities in dealing with the UK’s exit from the European Union as she made it clear that political imperative took priority over economics as she outlined that the UK was taking back control over immigration and law making process in return giving up access to Europe’s single market and customs union. She was, however, hopeful that some kind of a bespoke customs agreement could be reached with the EU. She said that no deal with the EU is better than a bad deal. For Brexit watchers, this is nothing more than a hard Brexit which has been one of the factors that hasve been hitting the pound recently. But looking at the price action last week, it was a completely different story, especially on Tuesday as the pound rallied.
There were a lot of factors that went into the strengthening of the British pound. Firstly, the event was widely communicated ahead of the event with investors bracing for any of the negative news. Secondly, the promise to put the Brexit deal to a parliamentary vote was seen as a positive for investors. The speech also came at a time when the U.S. dollar was also weaker, thanks in part to comments by the President-elect Donald Trump. Besides the British pound, the euro and the yen were also seen making steady grounds against the U.S. dollar on Tuesday.
Why EURGBP matters for traders?
Among the different GBP crosses, EURGBP is mostly likely to show some big trends taking shape over the coming months, especially as the markets edge closer into the months of February and March. Germany and Netherlands will be the two key EU countries that will be holding the presidential elections followed later by France.
The outcome of the elections is hard to predict amid a rise of populism and anti-establishment sentiment across the eurozone. A potential upset to the status quo could be seen to work only in favor of the UK as the Brexit talks are expected to begin around the March – April period, right after France and Germany will be elect new leaders.
Needless to say, the euro could be seen coming under pressure in the run-up to the event and in comparison; the British pound looks to remain on a more stable footing.
EURGBP – Head and Shoulders Pattern
Technically, the daily chart time frame for EURGBP shows the rather large head and shoulders pattern that has been unfolding since August 2016. The neckline support has been formed at £0.8400 while the peak of the rally saw EURGBP topping out near £0.9000. Last week’s rally and then a reversal near £0.8800 looks, at this point to be the formation of the right shoulder.
EURGBP weekly head and shoulders pattern (evolving)
Of course, a decline to the neckline at £0.8400 will validate the head and shoulders pattern. It also signals further declines to as much as £0.7800 on an eventful breakdown below the neckline support.