Pound: there's no reason to panic.

15 lis 2018

Today's pound sales took many by surprise and provoked panic among traders. With that, in our opinion, nothing extraordinary happened. The pound is feverish the whole current week, with the hikes reaching 100-150 points in a few hours. Yes, today the pound has rushed to 300 points, but once again, this is quite typical for today's pound.

The reasons for the spikes on the surface — Brexit talks are getting closer to the final and given the exceptional importance of the event, pound volatility has sharply increased.

Let’s remind briefly what happened, is happening and will be happening.

The graph above shows the classic reversal graphic pattern “double top”, the formation of which was directly related to the negotiation process between the EU and the UK. In the first half of 2018, the markets sincerely believed that the treaty would be concluded, resulting in the achievement of the pound in pairing with the dollar tops around 1.41-1.43. Let’s remember these numbers since they are the fair value of the GBPUSD pair, on condition to the so-called “non-rigid” Brexit.

Further, the market sentiments have changed and the markets have decided that there will be no deal, and “tough” Brexit is waiting for us. As a result, GBPUSD reached 1.27. Let us remember this figure, since it is a display of the fair value of the pound against the dollar, provided that the UK leaves the EU without a deal.

As we see, the current quotes by and large fully suit to the value of the pound provided that there will be no deal. That is, the markets again believe in the extremely “hard” Brexit.

In our view, the markets make mistakes and as a result, the pound is greatly undervalued. For the pair GBPUSD, we recall, this means an increase to 1.41-1.43.

A couple words why we consider that the markets can make mistakes.

Let's start with the main thing. This week, the UK and the EU agreed on a “draft” deal. That is, in fact, the agreement is already there. This does not mean that everything is over. On the contrary, there are still more than enough issues: the deal needs to be agreed in the Cabinet of Ministers, then approved in Parliament. That is, the struggle is just beginning, but the most important first step has already been taken.

Today's sales - this is just one of the panic days, which will still be quite a few on the way to the final. Recall that the discussion of the draft Brexit agreement, which Theresa May agreed with the EU, ended with the resignation of three ministers and the activation of the opposition in the UK Parliament. It was expected and predictable. May will remove dissent or dissent will leave. The Prime Minister needs a team of like-minded people. So there is a natural selection.

The next phase is tough negotiations in Parliament. They will be extremely difficult, there will be a lot of doors slamming and scandals. But Britain has already gone too far to turn back. Besides, we don’t forget that there are tens of billions of pounds of potential losses for Britain behind this deal. And when it comes to money, the parties will always be able to agree. Actually, the "drafts" of the treaty are a confirmation of this.

And finally, let’s consider the extreme scenario. Teresa May is shifted. A new referendum is announced and Britain refuses Brexit altogether. Where in this case will be a pound? That's right, about there, where it was before Brexit, that is, the area of 1.50. So no matter how the events unfold, the result will be one - the pound will grow.


Total, current prices are a unique opportunity, which is very rare on the market (every few years). Of the errors of this magnitude, we can only recall a bubble in the cryptocurrency market (then the markets were mistaken with a Bitcoin cost of 70-80 percent), an oil bubble of 2014 (then oil collapsed from 110 to 50 dollars per barrel), a dot-com bubble (at the start The 2000s Nasdaq Index lost half its value). Gains potential when buying a pound from the current is calculated 1200-1500 points. In this case, the foot more than limited. Our recommendation is unequivocal - mid-term purchases of pounds from current ones. And you can buy a pound against the dollar as well as against the Japanese yen or the euro. That is, the following deals are recommended to buy GBPUSD, buy GBPJPY and sell EURGBP. it's just a little while now, the UK has even not months, but weeks to complete the negotiation process and agree on all formalities. So the deal will work relatively quickly.