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by Charalambos Pissouros

Pound Stays Hostage to Brexit Developments

It’s been a roller-coaster ride for the pound lately, and once again the driving force was headlines surrounding the UK politics. Following recent remarks by German Chancellor Angela Merkel and French President Emmanuel Macron, who appeared to have adopted a somewhat softer stance over the Irish backstop, the UK government has declared war with its own Parliament.

It all started last week, when opposition parties agreed to work together in an attempt to stop a no-deal Brexit. Remember that the position of the new UK Prime Minister, Boris Johnson, is to leave the EU by October 31st with or without a deal. Sterling rallied on the news, but just the next day, Johnson decided to suspend Parliament from around mid-September, which forced the currency to take a 180-degree spin and dive. The slump continued up until yesterday, with Cable testing territories last seen in October 2016, when we had the pound’s “flash crash”.

That said, in their first day in office after their summer break, MPs voted in favor of taking control of the parliamentary agenda today, with rumors ahead of the official voting giving sterling a shot in the arm. Today, MPs will vote on whether they should force the government to seek another Brexit delay, until January 31st, while PM Johnson has already tabled a motion to hold a general election, something he pledged to do in case he was defeated yesterday. Having said that though, it is far from guaranteed that he will get one. For a general election to be held, two-thirds of lawmakers would have to vote for it, and with Labor Leader Jeremy Corbyn saying that his party will vote in favor of new elections only if the bill over seeking a new extension takes a legislative form, Johnson’s motion is unlikely to pass today.

So, with all this in mind, the big question is not whether the extension bill will pass today, but whether it will turn into legislation. Otherwise, the government may well ignore it. But even if it becomes legally binding, and even if we get a new government that seeks a new three-month delay, a no-deal Brexit on October 31st would still not be off the table. For that to happen, the EU will have to accept the proposal. In our view, the pound could continue gaining today if MPs indeed approve the bill with regards to an extension, but what happens next will depend on whether it will turn into law, whether we will have elections, whether this will result in a new government, and whether the EU will accept any extension offer.

GBP/USD – Technical Outlook

Looking at GBP/USD’s technical picture for this year, we can see that up until around mid-March, the pair was moving higher. But the bulls fell short of hitting the 1.3400 barrier, with the pair taking a course south thereafter. Yesterday, the pair slid not only below its August low, but also fractionally below the lowest point of 2016. But the visit of that territory was brief. The bulls quickly jumped back in and lifted the rate higher, and by the end of the day totally recovered all the losses. Today, GBP/USD is rising and may continue to do so on some positive news from the UK Parliament. That said, let’s not forget that, technically, the pair is still below its medium-term downside line taken from the high of May 6th, so any move higher, for now, could be seen as a temporary correction. This is why from the short-term perspective, we may see some more upside, but if that downside line holds, it might be downhill again for GBP/USD in the medium-term.

A push further north could bring the pair to the 1.2207 area, which marks the inside swing low of August 26th. This would also put the rate closer to the aforementioned downside line, which may provide additional resistance and keep GBP/USD lower. If so, the bears may try to take advantage of the higher rate and push it back to the downside, aiming for the 1.2107 area again, but this time from above. If that area is just seen as a temporary obstacle for the pair, a break of it could send GBP/USD sliding all the way to the 1.2015 hurdle, or even to the 1.1958 level, which was tested yesterday and is the current low of this year.

Alternatively, if the previously mentioned downside line breaks and the rate accelerates above the 1.2310 barrier, which is the high of August 27th, this might spark hope in the eyes of a few more bulls. The pair could then travel to the 1.2380 obstacle, a break of which might send GBP/USD to the 1.2517 zone, marked near the high of July 25th. Slightly above that area, we have another good potential resistance area, at around 1.2577, which is near the highs of July 12th and 15th.

GBP/USD Daily chart technical analysis


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