Cable Likely to Remain Under Pressure from Brexit Risk

Key Points:

• Brexit risks continue to stock downward moves.

• Monitor the UK House Price figures.

• Cable to remain bearish in the week ahead.

The Cable continued to move lower last week despite a short term rally following the Fed’s rate decision. Much of the negativity is being fuelled by ongoing speculation of the UK Government shifting towards a decision to take the `hard Brexit’ option. This led to some capital flows moving out of the Cable late last week and saw the pair finished well down around the 1.2951 mark. Subsequently, it makes sense to take a look at what is potentially on the horizon for the embattled Cable in the week ahead.

The week continued to remain relatively negative for the Cable as, despite receiving a bump from the dovish Fed decision, finished the week sharply under pressure around the 1.2951 mark. Most of the selling came late in Friday’s session as speculation continues to mount that the Theresa May’s UK government is leaning towards taking the option for a hard and fast Brexit. This caused some alarm that the financial centre could be sharply impacted and subsequently led to capital flows out of the Cable. However, the downside was somewhat limited by the UK Treasuries latest report which seems to imply that the economy has picked up again following the initial shock from the divisive referendum.

The week ahead is likely to be relatively busy for the Cable given that the UK House Price figures are due out and forecast to fall towards the 0.3% m/m mark. In addition, the US Federal Reserve Chairperson is due to speak and this is likely to be a volatility inducing event given that there is still plenty of uncertainty floating around about the central bank’s policy direction.

Also, the pressure is building for some further clarification from the UK Government regarding their Brexit plans which could be an additional risk event for the Cable. The rhetoric has been leaning decidedly towards some swift action with the UK’s Brexit Minister suggesting that it was very improbable that Britain would remain in the single market. This was additionally followed up by the Internal Trade Minister who also stated that the UK would seek independent membership of the World Trade Organisation. Subsequently, there are plenty of reasons to suggest that a `hard Brexit’ could actually be a reality in the near term.

From a technical perspective, our initial bias for the pair remains bearish given the recent decline back below the key 1.30 handle. Subsequently, the pair is likely to remain under pressure and we could see continuing selling down towards the 1.2865 mark as given that the RSI Oscillator still has room to unwind. Support is currently in place for the pair at 1.2912, 1.2865, and 1.2794. Resistance exists on the upside at 1.3252, 1.3447, and 1.3534.

Subsequently, there are a variety of fundamental and technical reasons to suggest that the Cable will remain under pressure in the week ahead. Ultimately, the lack of clarity and ongoing machinations around a potential Brexit are likely to keep the Cable capped below the key 1.30 handle and cause plenty of volatility as the financial hub assesses the inherent risks.