What Next After the Recent GBP/USD Sell-Off?

In June 2014, the GBP/USD pair reached a high of 1.7185. After that, the pair started moving down, with the descend accelerating in June 2016 after the Brexit vote. Yesterday, the pair continued to move lower, reaching a low of 1.2840, the lowest level since August last year. The current descent is because of the ongoing Brexit negotiations.

On Sunday, Liam Fox, the UK foreign minister said that the chances of a no Brexit deal were above 60%. This was after another minister raised the chances for no deal. Last week, the EU negotiator rejected parts of the proposals made by Theresa May. Bank of England governor said that the chances of a no-deal Brexit were uncomfortably high.

A no-deal Brexit deal means that starting from March, the UK’s business relationship with the European Union. Proponents of this situation believe that the UK’s business with the EU will be protected by the World Trade Organization (WTO). They therefore believe that a UK with no ties to the EU will be more competitive. The companies would be able to negotiate with suppliers from around the world, which would theoretically reduce the prices of the inputs.

Last month, before his resignation, Boris Johnson promoted a no-Brexit deal and even supported the tactics used by Donald Trump in negotiations. Shortly afterwards, the US president said that he had advised Theresa May to sue the EU and play hard ball with them.

The EU and the UK have a point to prove. The EU wants to make it hard for the UK – its second largest economy – to leave the EU. This will in turn be a lesson to other EU countries thinking of exiting the union. The UK on the other hand wants to show other EU countries that it is possible to leave the EU and be successful.

The GBP/USD pair has reached at 1.2877, which is the lowest level in almost an year. This price is below all the major moving averages. The parabolic SAR is currently pointing to a lower movement trend while the RSI is currently at 21. The latter is an indication that the pair is oversold and could start moving higher. In the long-run, this will be a good entry level for contrarian traders. However, in the short-term, the pair could continue moving lower until a bullish catalyst emerges.

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