GBP/USD: political uncertainty could send pound to August 2017 lows in 1.27 handle

Cable has dropped to 1.2919 which was the lowest level since September 2017, surpassing July's low of 1.2958 and Friday's low of 1.2975 where Carney also warned of a no Brexit deal. Currently, it trades at 1.2937 in a slight recovery in NY trade today, down from the 1.30 handle from overnight. 

The BBC reported on the article and here are those keynotes from the BBC's piece titled: 'Liam Fox: No deal most likely Brexit outcome for UK:

• Fox is blaming the "intransigence" of the European Commission.
• The international trade secretary and Brexiteer put the chance of failing to come to an agreement at "60-40".
• He told the Sunday Times that Brussels' chief negotiator had dismissed the UK's Chequers proposals simply because "we have never done it before".
• No 10 insists the government remains confident it can get a good deal.
• Mr Fox told the paper that he had not thought the likelihood of no-deal was higher than 50-50, but the risk had increased.
• He said the EU had to decide whether to act in the economic best interests of its people, or to go on pursuing an approach determined by an obsession with the purity of its rules.
• "I think the intransigence of the commission is pushing us towards no deal," he said.

 The statements have given rise to a very bearish outlook for the pound just day's after oft Brexit noise that came from EU's Barnier acceptance of 'The City plan' where he eased the opposition to May’s Brexit plan for City of London as the EU’s chief negotiator and when he acknowledged that Brussels would have ultimate control over London’s financial services industry's (AKA, The City’s) access to European markets.

Markets are taking heed of key UK heads on Brexit no deal warnings

However, the markets are certainly taking heed from such warnings from the governor of the Bank of England and Liam Fox as International Trade Secretary for the UK.  Looking at the options market, the premium to protect against a decline in GBP is on the rise. Also to note,  risk reversals, which highlight the GBP put versus GBP call vol premium in GBP/USD options, are at their highest since early 2017, even surpassing the high premiums seen before the June 2017 elections analyst, PRONITA NAIDU, at IFR Markets, (IFR Alerts) wrote today in the NA open:

"The nine-month and one-year contracts, which will cover Britain's exit from the EU in March 2018, have more than doubled in price. One-year risk reversals went from 0.6 to 1.6 vol premium for GBP puts in only eight weeks, an even more rapid rise than those seen in the run-up to that June 2017 election."

Looking ahead

It is impossible to judge where the pound will be left in the Brexit uncertainties at this stage, for there is time left for negotiations to continue towards a deal, and indeed, PM May can always request for the end of March deadline to be extended, effectively stopping the Brexit clock for a moment's pause, and a time to reflect, which at this stage seems pretty necessary, where Fox does have a point when he said, "the risk of no agreement is being increased by those in Brussels committed to “the purity of the EU’s ideology”.

The next noise is likely to come from sound bites of France's Macron and May's meeting that took place on Friday last week. Otherwise, traders will look to this weeks reading for UK Q4 GDP data that will come on Friday which, if it is a good number, could lend the pound some much-needed demand which is otherwise on the decline due to the political uncertainty. 

GBP/USD levels

The descending support line was located down at 1.2957 and directly below there comes the Fibonacci support at 1.2918, (50% retracement of the move up from 2016) where the low was recently made. A break there opens risk right the way down to the August 2017 low at 1.2773. On a break of the channel's resistance, however, 1.3200 guards the 50-D SMA - this is now located at 1.3212 ahead of 1.3461/80 that comes before the convergence of the 200-D SMA (1.3581) and 1.3597/1.3600. The 1.3708 level at the 50% Fib of 1.3040-1.4377 remains compelling on the wide.