This may be a historical time for British Pound

Unless are coming from Mars, you don’t need me to tell you what is happening to the UK. Yes, it has officially started to process to leave the EU. A year ago when Brits went to the poll to vote, the market was largely expecting it would stay. Then it came as a bombshell that the result was to exit! Of course the bloodshed for the British Pound (BP) started. The drop has been relentless for almost one year but I think finally we are probably seeing the light at the end of the tunnel for BP now. Three major reasons:

• While there are still a lot of uncertainties during the next 1-2 years before the Brexit is fully completed, the worst has likely been priced in by the market. There should be no surprise anymore that the UK economy will be negatively impacted to a great extend after leaving the EU. Considering the market is usually overreacting, I think the ultimate outcome may not be as bad as it is expected. Actually I think UK is becoming some sort of “safe harbor” in the EU now when many EU countries including the leading county like France is facing the uncertainty of whether the upcoming presidential election could mean disintegration of the EU. Since such kind of widespread uncertainty has little impact on the UK now, BP may be more and more favored by the currency traders. After all, UK is still one of the most powerful economies in the world and its currency won’t go to dust by any imagination! Additionally, without being in the EU, UK has more freedom to decide its own political and economic policies, especially it will be much less impacted by the illegal immigrants and refugees.
• The sentiment towards BP has rarely been so depressed historically. I saw a report stating that in the whole history since the weekly COT report became available, only two times in the past that the speculative traders were so negative by betting so much short on BP as we are seeing today. But each time, BP mounted a good rebound with 10% or more increase in the months ahead. We are seeing such an negative extreme again. Will the history repeat itself? It is anyone’s guess but I believe the probability is high.
• Throughout history, BP’s exchange rate vs US$ has mostly being over 2 and it has been mostly supported by the 1.4 level. It has only occurred 2 times as well that it dropped below 1.40. Again, each time it went up above in the months ahead. This is the 3^rd time it went down as low as below 1.20. Taking all together as discussed above, I bet it will follow the historical footstep as well to return to its historical norm to go above 1.40. Its technical picture seems also to support this idea with some positive momentum showing up.

Of course, as with any trading, there is no guarantee, especially regarding the timeframe. If you want to bet with this idea, be clear about your downside protection, e.g. a stop loss at its recent low around 1.17 with FXB.