By Konstantinos Anthis Senior Associate, Research, ADS Securities
By Konstantinos Anthis Senior Associate, Research, ADS Securities

The British pound faces huge risks

Q1 has not been a positive period for the British Pound, which has dropped around 500 pips since late January. Even though the first few weeks of 2018 were positive for sterling, fresh news coming from Brussels on the progress of the Brexit talks caught investors off guard. 

The British pound faces huge risks

Q1 has not been a positive period for the British Pound, which has dropped around 500 pips since late January. Even though the first few weeks of 2018 were positive for sterling, fresh news coming from Brussels on the progress of the Brexit talks caught investors off guard. 

The first draft from the Eurozone regarding the future agreement between the UK and the EU revealed that issues that we thought had been resolved are still there.  These include the Northern Ireland border and the jurisdiction of the European Court of Justice both of which could completely derail the Brexit talks.
So what should we expect for the next few weeks and what are the catalysts that will drive the price action for the British currency? Clearly the progress of the Brexit negotiations will dominate news. Any fresh headlines, especially if they indicate that the EU leaders want to play hardball, will hurt the pound. A few countries in the Eurozone had expressed a willingness to give London a softer type of Brexit and they were prepared to discuss a special relationship for the City, but it seems that the hardliners in Brussels will not entertain this approach.  At the same time, the US dollar is back on the rise and with the Fed preparing for a more aggressive round of tightening this year, Cable could come under further pressure.

From a technical standpoint, the pound is still trading above the 1.37 mark, with the early March dip being the low for 2018. But, the real risk comes from a break below this important support level. Should fresh news further complicate the progress of the Brexit talks or if the dollar picks up more momentum with the Fed delivering four rate hikes this year, the pound will likely break below 1.37 and below that there is no clear support. The next real stop comes around the 1.35 mark which would represent a significant drop for the UK currency, but one we have to take into account when looking at our options. Unfortunately for Britain the broader outlook for the domestic currency has turned bearish and the only thing that could keep the pound supported is the bullish bias coming from the Bank of England but can expectations for a rate hike sometime in 2018 keep the short sellers at bay? In my opinion, the answer is unfortunately negative.