In its annual report on the British economy, the International Monetary Fund (IMF) warns that a hard Brexit will wipe out 4% of the UK GDP and subsequently it will send the UK into recession. There are always two sides of the coin so a no deal Brexit will inflict some pain across Europe as well. However, the IMF only predicts the EU to suffer a smaller hit of 1.5% of GDP from a no deal Brexit.
According to the same IMF report, “among the most exposed economies to Brexit-related adverse shocks,” are Britain’s closest neighbors like Ireland, Netherlands and Belgium. The lack of progress between the UK PM May and Brussels on critical issues on the UK's divorce bill implies that the risks of a hard Brexit are bigger now than they were a month ago.
The Sterling exchange rate reflects the tensions around the Brexit talks. Despite its impressive euphoric rally at the beginning of the year, GBPUSD is now down almost 3.6% YTD. The absence of any kind of agreement inside the UK or between the EU and UK in Brexit talks has to affect the Bank of England ability to pursue another interest rate hike.
The odds of a change in the BOE’s interest rate policy on August meeting have fallen dramatically. BOE Governor Carney also suggested that a hard Brexit will have severe economic consequences, and it will definitely require a swift review of interest rates. The recent resignations from Theresa May’s cabinet and with just over a week to go until the BOE decides on its interest rate policy we can expect the British Pound to be driven back and forth between the Brexit theme and the interest rate theme.
The GBPUSD technical pattern remains predominantly bearish while we trade below the key 200-day moving average and below the yearly opening price. However, we will only see the bearish momentum getting traction to the downside again once we clear out the big psychological number 1.30. The closer we get to a no deal Brexit scenario, the bigger the chance of a drop well below the big round number 1.30 and beyond.
In the short-term, the GBPUSD has the potential to fill in the previous week price range. But, the upside should be limited, and if we reach the intraday resistance level1.3230, we can expect the bears to show up.
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