Prime Minister Theresa May believes that it is possible to begin Brexit negotiations by March 2017. However, investors are uncertain about precisely which course of action the UK government will be taking vis-a-vis a Brexit. Whether Prime Minister Theresa May opts for a hard Brexit or a soft Brexit is anyone’s guess. A slow extrication of the UK from the EU would invariably minimise the economic and political fallout. A recently held Conservative party conference may offer some clues. When it comes time to invoke Article 50 of the Lisbon Treaty, it is likely that May will favour a clean break. Investors have reacted accordingly, and sold the pound en masse. That the GBP dropped 4% after the Conservative Party conference is evidence of bearish speculative sentiment.

A leading currency strategist, David Bloom of HSBC, is anticipating a GBP/USD exchange rate of 1.20 by the end of the year. For next year, Bloom anticipates an exchange rate of 1.10. This will also bring the GBP/EUR pair into parity. Currently, the GBP/EUR pair is trading at 1.1090. This pair has depreciated by 18.01% for the year-to-date, after having started at 1.3578. Likewise, the GBP/USD currency pair has depreciated by 15.85% for the year-to-date, after having started the year at 1.47381 on January 1. The GBP/JPY currency pair has been hardest hit after losing 27.41% for the year-to-date. The impact of a rapidly depreciating GBP is an appreciating FTSE 100 index. Currently, the FTSE 100 index is trading at 7,044.39, up 0.63% or 44.43 points. The 52-week trading range is 5,499.50 on the low end and 7,079.25 on the high end. The FTSE 100 index rallies when the GBP declines for the following reasons:

• The FTSE 100 index is comprised of a huge number of overseas-based operations. The Capital Group conducted a study indicating that 30% of all revenues on the FTSE 100 index are derived from the EM economies, 4% from developed Asia, 2% from Canada, 5% from Japan, 19% from the US and 17% from Europe.
• When the GBP depreciates, the export potential of UK-listed companies improves. Additionally, repatriated earnings from overseas countries to the UK reflect increased GBP earnings.

What is Driving the GBP?

The purported algorithmic collapse of the GBP on Thursday, 6 October had far-reaching implications for the currency. Currency traders have attributed the GBP crash against the USD to the lack of interbank traders. Recall that the GBP plunged 6% against the greenback in 2 minutes. Interbank traders typically provide pricing regardless of the economic trading conditions. Nowadays, large-scale interbank trading platforms are in play. They utilise algorithms to constantly analyse risks and track market liquidity. What happens when a problem arises in one trading platform inherently impacts upon the next trading platform – generating mass market panic. During the trading sessions on Friday, it appears that a knockout option to place at 1.2600. When that level was breached, the trading platform kicked in a massive number of stop-loss orders.

The algorithmic collapse took place in an early trading session in Asia, with very little buying interest to absorb the supply of GBP on the market. As a result, the sterling continued to weaken. Panic ensued, and the number of sellers increased at various levels. The sell-off was widespread and this further exacerbated the declines in the GBP. The flash crash that impacted the GBP/USD pair resulted in losses of 500 points. There are 3 events scheduled for this upcoming week. These include the following:

• The BRC retail sales monitor will be released on Monday, 10 October 2016
• The RICS house price balance will be released on Wednesday, 12 October 2016
• The Bank of England credit conditions survey will be released on Friday, 14 October 2016

In terms of technical analysis, the GBP/USD pair opened last week at 1.2929, and it reached a high of 1.2946. Support briefly held at 1.2902. From there, the pair plunged to 1.1943 and ended at 1.2422 on Friday, 7 October. It is interesting to point out that the GBP/USD pair had a cushion of 1.261 to 31 years ago. In May 1985, the pair was capped at 1.1954. It is evident that the Brexit saga is the most contentious issue facing the UK and European economy and binary options traders should be monitoring any news related to Brexit as this will lead to trading opportunites. 

Markets remain on edge and this comes in spite of positive economic data releases during Q3 2016 from the UK. That the GBP had a lacklustre week in the first week of October has helped to drive the currency to 3 decade lows against the greenback. Most analysts evaluating the performance of the GBP/USD pair on technical indicators of bearish. The fundamentals of the UK economy appear to be sound at this point in time, but the lag effect of a Brexit will invariably reveal itself as market realities catch up.