Europe was in mourning after Belgium suffered the worst terror attack in its history with 34 people dead and dozens injured – some severely. However, the impact of the Brussels bomb blasts had far-reaching ramifications across the English Channel in the United Kingdom. The GBP plunged from 1.4398 down to its closing level of 1.4208 for a loss of 1.13% during the day. The reaction to the shock news from Belgium rocked currencies markets across the continent, with the GBP coming in for some serious tap. The year-to-date return for this currency pair is -3.58% – that’s how much the sterling has depreciated against the dollar. The day’s trading range was 1.4191 on the low end and 1.4398 on the high end.

Why the volatility with the GBP?

The terror attacks in Brussels generated mass hysteria on home soil and it quickly spread across the continent and through the UK financial sector. The United Kingdom is currently undergoing its own challenges vis-a-vis Prime Minister David Cameron’s war of words with the Mayor of London Boris Johnson and members of his own Cabinet. Other issues include the UK budget, and the shock resignation of Iain Duncan Smith. Combined, these matters have fused with other major concerns such as the upcoming referendum on a Brexit on June 23, 2016. Growing anxiety levels have resulted in the sterling losing strength in 2016. It is precisely this Euroscepticism, and mass speculation that is driving short-term currency weakness for the GBP.

At the heart of the issue are open borders in the UK with the rest of Europe. Since the United Kingdom does not subscribe to Schengen visa regulations, it requires all those visiting Britain to have passports or passport cards to move and travel through British immigration. However, Britain is subject to European Union immigration laws which state that any EU national can live, work and travel freely within all EU countries – including the United Kingdom. This presents Britain with unique security, social and economic challenges. The hawks in the Tory Cabinet and right-wing politicians have seized upon the terror attacks for their own ends. The immediate casualty is the GBP, and to a lesser degree the FTSE 100 index in the aftermath of the Belgian terror attacks. Traders have been shorting the GBP as rhetoric about a Brexit fills the airwaves. The likelihood of such a scenario occurring remains weak, but the chatter is driving speculators to place put options on the GBP/USD currency pair.

Beyond the GBP, the UK indices all moved higher as the day wore on yesterday, with the FTSE 100 gaining 8.16 points, the FTSE 250 gaining 41.10 points, the FTSE 350 gaining 5.21 points, the FTSE all share index gaining 5.29 point, and others gaining accordingly. The Gross Domestic Product (GDP) growth rate of the UK is 0.5%, with an unemployment rate of 5.1%. The country currently has an inflation rate of 0.3%, and an interest-rate of 0.5%. The country’s balance of trade is -GBP3,459 million (exports of GBP41,386 million and imports of GBP44,845 million). However, if we evaluate the performance of the British pound/US dollar currency pair, it is a strong sell on most every account on an hour to hour basis. If we look at the MAs (moving averages), this pair is a strong sell, and much the same is true when we look at the technical indicators of the pair.

The greenback performed somewhat better against a basket of currencies on Tuesday, 22 March, but there was a degree of caution in the manner in which it was trading. What tends to happen after terrorist activity is that investors flock to save haven markets like the US. But the day’s trading activity was largely the result of economic data from ongoing reports. For example, the EUR managed to claw its way back to some respectability after a report from the ZEW Centre for Economic Research indicated modest gains for German economic sentiment (less than analysts’ forecasts). But the German Business Climate Index rose from 105.7 to its current level of 106.7 in March. This is definitely a bullish sign for the European economy despite the bomb blasts that rocked Brussels to its core.

How Should You Trade the GBP/USD Pair this Week?

Considering that the GBP shed 0.91% against the EUR, 1.07% against the USD, 0.93% against the CHF, 0.71% against the JPY, 1.45% against the CAD and 1.56% against the AUD, it is clear that sentiment for this currency is strongly bearish. The question is whether the trend will continue on Wednesday, 23 March 2016? The S2 support level is 1.4298 and the S1 support level is 1.4334. The R1 resistance level is 1.4437 and the R2 resistance level is 1.4504. Contrary to all of the data I’ve posted above, the general feeling in the market is that the GBP/USD pair is on the cusp of an upswing.

Trader sentiment is now becoming strongly bullish and it will likely result in a much-awaited reversal. Consider for a moment that the GBP/USD pair was trading at 1.50 just 5 months ago and that those same speculators shorted the pair. Now, they’re switching once again. One of the most curious indices is the Speculative Sentiment Index (show above). There is however a general trend of dollar weakness which extends beyond the current strength of the USD against the GBP. Overall, I’m going to suggest trading the trend and consider call options on the GBP/USD pair. Dollar weakness is indeed stronger than the short-term weakness of the GBP amid anxieties over the Brussels terror attacks.