Idea of the day GBP waiting for a Hammond bounce

What: Tonight there will be a key test for the UK currency, is it still driven by the UK’s Brexit prospects? At 2100 BST this evening the Chancellor Philip Hammond is scheduled to deliver his annual Mansion House address and reports expect him to throw his support behind a “soft” Brexit for the UK, and potentially supporting the UK staying part of the Customs Union and remaining in the single market. Considering the prospect of a hard Brexit has been kryptonite for the pound in the past year, will Hammond’s softer approach drive demand for the UK currency?

How: We are focusing on GBP/USD, which has been one of the clearest ways of trading the pound’s Brexit ups and downs in the past 12 months. GBP/USD has been fading into Hammond’s speech, and remains stuck in a post-election range between 1.2650 – 1.2800. We believe that if the Chancellor does plot out his plan for a credible soft Brexit then we could see GBP/USD break above 1.2800, which is short term resistance, and it may also drive a recovery back to 1.30 in the coming days.

GBP/USD price action has been range bound in the lead up to Hammond’s speech, as mentioned above. There have been willing buyers at 1.2650, so if GBP/USD does decline to this level later today then we think that could attract buyers. If the recovery in GBP/USD is spurred on by Hammond’s speech later today, then an entry level at the recent low could lead to a good risk/reward ratio if we see back to the top of the recent range and a break through it back towards 1.30.  

We would suggest that if we do see back above the top of the recent GBP/USD range then it is worth pushing your stop loss to around the 1.2800 mark to protect your profits.

Source: City Index and Bloomberg