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Selling pressure will continue for GBP
SINCE the start of the year, the process of the United Kingdom's (UK's) withdrawal from the European Union (EU), also known as Brexit, has been one of the key drivers in moving the GBP.
With Brexit set for March 29, 2019, the UK has to prepare for major changes in its interactions with the EU in areas like banking & finance, cross-border trade and immigration policies. Despite the deadline nearing, UK Prime Minister Theresa May's proposed Brexit deal has yet to muster the required political support at home in Britain.
The International Monetary Fund (IMF) has issued statements of concern on Britain's economy if the UK were to leave the EU without a certain agreement in place. This uncertainty has caused a prolonged sell-off in GBP against major currencies since April 2018, and the GBP/SGD has slumped almost 5.3 per cent since the beginning of 2018.
The chart depicts an increased volatility in GBP/SGD this year with an average swing of 5 per cent every month, starting from April 2018, compared to a monthly average trading range of 3.5 per cent in 2017. These swings correspond with notable events as Brexit negotiations proceeded.
From end-March to mid-April for example, we saw GBP/SGD rise by 2.3 per cent when the UK and EU agreed to revive discussion on Brexit which had stalled for a year. But the positive recovery was cut short by EU chief negotiator Michel Barnier's remarks that disagreements on key issues like the Irish border controversy would result in failed talks.
This alone resulted in a 3 per cent decline in the second half of April 2018, and overall, a classic reversal pattern was formed. After bottoming in August 2018, the GBP/SGD pair showed signs of recovery, until the sudden retracement in September that resulted in a head and shoulder pattern (Sep 12 until present). The current neckline of the "head and shoulder" was a previous downtrend line, which increases the probability of the pattern realising.
Presently, prices are falling towards the neckline support. This technical observation is aligned with the actual fundamental situation of investors losing confidence in Prime Minister May's ability to get her Brexit plan approved in a divided UK parliament. The loss in investor confidence could be the catalyst for prices to break below the neckline support. The target price of the "head and shoulder" will be 1.70, which is the 127 per cent levels based on the Fibonacci Retracement (drawn from the 1.881 year high on April 17, 2018 to the 1.741 year low on Aug 17, 2018).
The moving averages (MAs) further reinforce the notion that selling pressure will continue. Current prices are well below the 150 SMA, indicating that the GBP/SGD is still on a downtrend. Furthermore, a "death cross" has formed, a bearish phenomenon that occurs when the short-term moving average (40 SMA) crosses below the long-term moving average (150 SMA).
With all the indicators bearish, the GBP/SGD is poised for further downside. Once prices have successfully broken below the neckline, prices could fall to its October 2016 levels of 1.70. This represents a 3.10 per cent downside from current prices.
- The writer is investment analyst at Phillip Futures. Disclaimer: Chartpoint is provided by
Phillip Securities Research for information only, and should not be construed as investment advice.
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