Brexit: What's next for the Sterling? - BBH

Marc Chandler, Global Head of Currency Strategy at BBH, notes that broad range trading in GBP/USD may be the most probable near-term scenario, with short-term players dominating, adding that the immediate range may be $1.3650-$1.3850 within the wider $1.35-$1.40 range.

Key Quotes

The dramatic reaction to the UK decision to leave the European Union has changed the technical condition in the foreign exchange market.  While the precipitating factor is a fundamental political development, it is mediated by psychology.  Group psychology is the subject of technical analysis.  In the current context, the technical analysis puts the price action in the larger context and provides mile-markers, as it were, and potential inflection points.

Typically volatility in the short-term is auto-correlated.  High volatility in one period is often followed by high volatility in the next.  Not to put too fine of a point on it, it is difficult to put toothpaste back into the tube.  That warns that price swings may still be large in the coming sessions.  Over the medium- and long-term, volatility is mean reverting, though it does not appear to hold for foreign exchange prices.

Sterling went from the year's high (a little above $1.50) to its lowest level in three decades (~$1.3230) in about seven hours in n unprecedented move.  From a technical point of view, we must assume that stops and optionality have been wiped out.  If support is where demand is enticed, and resistance is where supply is made available, then sterling's technicals have to be rebuilt.  

Sterling reached its rebound peak just as the European markets were opening on June 24.  It appears the European participants were happy to sell into that bounce that ended just shy of $1.40.  Sterling drifted lower through the European and North American sessions.  As London markets closed, sterling slipped to its European session lows and traded sideways in the US afternoon

Broad range trading may be the most probable near-term scenario, with short-term players dominating. While asset managers may see value opportunities, but will wait until a clearer picture emerges. The immediate range may be $1.3650-$1.3850 within the wider $1.35-$1.40 range.  Note that under normal circumstances sterling could spent weeks in a nickel range.