• When it came to the switch from currencies to the euro,
  • the Germans gave up their Deutsche mark,
  • the French franc disappeared,
  • and the Dutch guilder was no more,
  • the Greeks gave up their drachma, and
  • the Italians retired the lira.

However, the British pound remained the currency of choice for the UK. The British kept one foot in the EU and the other out of the united political and economic system.

• Immigration, regulatory, and other issues ate away at the already weak strings that made the British part of the EU. In June 2016, the British electorate voted to exit the EU. It has taken over 3.5 years to fulfill the will of the British people.
• A departure from the EU with an agreement should be bullish for the British currency. The FXB product moves higher with the pound and lower versus the US dollar currency.

Sitting at over the $1.30 level against the U.S. dollar

The pound versus the US dollar currency pair was at over the $1.3100 level on the nearby March futures contract on January 22.

Source: CQG

• As the daily chart highlights, the pound seems to have found a base at the $1.30 level in 2020. Price momentum and relative strength indicators were on either side of neutral readings.
  • The total number of open long and short positions was stable at around the 198,000-contract level on January 22,
  • daily historical volatility at 6.39% declined from over 10% in late December through mid-January.
• With the deadline for Brexit on the horizon at the end of this month, the prospects are for a rise in the value of the British currency against the US dollar.

The election pushed the pound to just over the $1.35 level

In the aftermath of the December 12 election in the UK, the knee-jerk reaction took the pound to its highest level since May 2018.

Source: CQG

• The weekly chart illustrates that the pound rose to a high of $1.3510 against the dollar following the British election on December 12.
• After settling back to the $1.3130 level, price momentum and relative strength were on either side of neutral territory.
  • Open interest declined from 276,240 contracts during the week of December 9 to its current level of 198,017 contracts as of January 22.
  • The over 28.3% drop in the total number of open long and short positions as the value of the pound corrected lower over the past weeks is not typically a validation of a lower trend in the currency pair in a futures market.
  • Weekly historical volatility declined from over 11% to its current level of 7.99% as much of the speculative froth in the market dissipated after the election.

Brexit will provide certainty but will trigger new issues

• Brexit is only the first step towards British independence from the EU, and it will start a process of negotiations with the EU, US, and other trading partners around the globe that will determine the future of the UK economy.
• A trade deal between the UK and the US will be one of the first steps to ensuring that the British economy will thrive. However, the EU will continue to be the most significant economic power in the region, which will create challenges for the British economy.
  • London has been a financial center and the hub of business activity in Europe for decades, if not centuries. There is still some uncertainty when it comes to the future of London’s role in Europe and the world.
• The author is bullish on the pound and believes that the UK will find a way to establish the nation as a global economic power. The British pound should continue to recover and is expected to move towards or above the $1.40 level in 2020 against the US dollar on the nearby futures contract.

FXB is the ETF product that follows the pound versus the U.S. dollar currency pair

• The most direct route for a risk position or investment in the British pound against the US dollar is via the OTC foreign exchange market or the futures that trade on Chicago Mercantile Exchange.
• For those market participants that wish to position in the pound without venturing into the OTC or futures arenas, the FXB product provides an alternative.

Content source: Hecht. A. (2020) The British Pound As Brexit Approaches. Seeking Alpha. Available from: https://seekingalpha.com/article/4318610-british-pound-brexit-approaches [Accessed 30 January, 2020]