Could Trump save Brexit-hit GBP/USD?

<p>With many analysts making lots of comparisons between the outcome of US elections and Brexit, it is only right that we took a look at […]</p>

With many analysts making lots of comparisons between the outcome of US elections and Brexit, it is only right that we took a look at the cable today. Before that, let’s just remind ourselves what actually happened overnight…

Overnight recap: Rollercoaster ride for markets as Trump becomes 45th US president

If you happened to be away from your screens for the past 15 hours or so and came back and saw the S&P 500 cash index, you would probably think that nothing really happened overnight. Except that, a lot did happen. As it became obvious that Donald Trump was going to win the US elections, risk-sensitive assets started to drop sharply overnight which eventually resulted in the S&P 500 futures being halted as the Dow futures plunged by a whopping 800 points at one stage. The dollar slumped as the odds for a December rate hike fell to 50%. All this helped to boost the appeal of safe-haven assets, causing dollar-denominated gold and silver to surge higher. Speculators and dare I saw algos were basically in panic mode. They were selling stocks, index futures and the dollar at every opportunity.

However, as soon as the London session got underway, things started to turn around very quickly as market participants made a more sober assessment of the whole situation. Clearly, the magnitude of the overnight sell-off meant that the markets were perhaps overreacting to all the fears, in the same way as they did in the immediate aftermath of Brexit. Some used the opportunity to buy stocks on the cheap. But unlike the Brexit situation when the domestic currency (i.e. the pound) remained low, this time the dollar actually turned back higher. You can point your finger at the impact of profit-taking, but this alone cannot explain everything. But to assume that the selling of stocks and the dollar is done and dusted is a very risky assumption to make. At least the dust has settled down now and what happens next will likely determine the direction for the days and perhaps weeks ahead.

Brexit vs. US elections: Could GBP/USD stage a rally?

With many analysts making lots of comparisons between the outcome of US elections and Brexit, it is only right that we took a look at the GBP/USD today. The pound has actually managed to hold its own relatively well against the dollar, and has done exceptionally well against the euro. Things actually started to turn positive for the beleaguered currency towards the end of last month. This was chiefly in response to the Bank of England’s decision to abandon its dovish bias after admitting that UK inflation could overshoot the 2% target, due to the currency’s slump. Added to this, news that the High Court ruled that the government must seek parliament’s approval before triggering Brexit Article 50 was also deemed pound-positive as this could delay Britain’s exit from the EU or potentially even stop it altogether. Mind you, the whole situation is a total mess, but now the situation across the pond could take the limelight away from the UK and towards US politics.

With the BoE now neutral and UK data remaining surprisingly strong despite these uncertain times for the UK, the cable could stage a more meaningful comeback, though we are unlikely to see 1.40s or 1.50s any time soon. Recent price action however suggests that a low may have been made around the 1.20s. With Trump set to take over from Obama in the White House in January, the Federal Reserve may decide to wait until the first quarter of 2017 before raising rates, although the markets appear to be about 80% confident that a rate rise will happen before the end of this year.

Technical outlook: short-term bias bullish

From a technical point of view, things are starting to look a little bit brighter for the GBP/USD. As can be seen on the 4-hour chart, below, the cable has already broken above its bearish trend line. It has also held above the broken resistance at 1.2350 and the rising 21-period exponential and 50-period simple moving averages. So clearly, the short-term trend is currently bullish. This will change however if the 1.2350 support level gives way. Unless that happens, there is a good chance we will revisit the 1.25 psychological level, the recent swing highs around 1.2550 and the point of origin of the flash crash breakdown at 1.2600. A couple of other medium-term levels to watch include 1.2680/5 and then 1.2800.

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