GBP/USD: potential for a renewed near-term attempt at the mid-1.18 - Scotiabank

Eric Theoret, Strategist at Scotiabank, notes that GBP/USD short-lived ‘flash’ crash appears unprovoked and can likely be attributed to thin market conditions. He also noted the potential for a renewed near-term attempt at the mid-1.18 Asian session low and continue to highlight the absence of major support ahead of the multi-decade 1.05 low.

Key Quotes

“GBP is weak, down roughly 2% having recovered from a short-lived ‘flash’ crash to the mid-1.18s. The catalyst for the decline has yet to be identified, with some market participants highlighting comments from French President Hollande (“*HOLLANDE SAYS NOT POSSIBLE TO HAVE BREXIT WITHOUT ANY COST - Bloomberg) and their release as part of an FT article (‘Hollande demands tough Brexit negotiations’) however neither correspond with the 7pm ET GBP drop. The Hollande headlines hit the wires around 3pm ET on Thursday, and the FT article was published at 7:56pm ET.”

“As such, the move appears unprovoked and can likely be attributed to thin market conditions in early Asian session trading....There have been no signs of intervention and no official commentary from the Bank of England.”

“Measures of implied volatility are surging and risk reversals hint to a material rise in the premium for protection against GBP weakness.”

“GBPUSD short-term technicals: bearish—GBP remains vulnerable despite extended bearish momentum signals—the RSI well beyond the oversold threshold at 30 with a current level of 21. We note the potential for a renewed near-term attempt at the mid-1.18 Asian session low and continue to highlight the absence of major support ahead of the multi-decade 1.05 low.”