Brexit is the only game in town for the pound. Sterling looks set for a rocky week of trading after slumping overnight on Monday, January 16th to levels not seen since the ‘flash crash’ of October as political uncertainty over the triggering of Article 50 trumps all other concerns.

GBPUSD skidded below $1.20 at one stage in the Asian session and is exposed to further losses ahead of Theresa May’s Brexit speech on Tuesday. Cable is now clinging to the $1.20 handle for dear life. Although it steadied a little as trading commenced in London – pound trading in Asia is often quite volatile because of thin liquidity. Meanwhile, the pound slipped to its weakest level against the euro since November as EURGBP broke above €0.88.

It’s looking more and more like a ‘hard’ Brexit is in the offing and markets are responding. The currency market is the most efficient and swiftest to price in this kind of political risk. However the full effects of a hard Brexit are not yet completely discounted by the markets and so we could have further to run depending on what is said tomorrow.

We now have to assume May will prioritise immigration controls and the price to pay will be to exit the single market. That could send the pound a lot lower still and short-term rallies could be selling opportunities.

GBPUSD_Jan16_daily

The Supreme Court’s ruling on the triggering of Article 50 is another risk factor that is likely to increase volatility in pound crosses. Options trading suggests GBPUSD 1-month volatility is at a four-month high.

May probably won’t give everything away and explain the government bargaining position in detail, but it looks like she will sound more hawkish and steer the tone towards a hard Brexit. The PM’s statements have a habit of hitting sterling pretty hard and today’s moves are clear signs of nervousness in the fx market.

The PM could, however, strike a more soothing tone than markets expect and that could spark a significant short-term reversal in cable, although long-term it’s going to be hard to shake the bears.

Sterling weakness is good news for the FTSE 100, which might be expected to notch up more gains if the correlation between pound weakness and UK equities follows the recent trend.

GBP data watch:

Monday, January 16th

Bank of England governor Mark Carney due to speak

Tuesday, January 17th

Prime minister Theresa May speech on Article 50

09:30 (GMT) – CPI inflation data

Friday, January 20th

09:30 – UK retail sales

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