The saga surrounding Brexit will soon come to an end on March 29, if there is no request from UK to extend it. This scenario is getting unlikely as the UK parliament struggles to agree on a deal over the irish backstop. If a deal is not put together by PM May by 27 February, she has promised to update Parliament on its progress and allow lawmakers to debate for alternative courses of action. It may include Parliament taking control of the exit process from the government which can have multiple consequences. Therefore, it may take some time before a better deal can be materialized to be put up for a meaningful vote in Parliament.
Regardless of what happens this week, the bottom line is that it is definitely not in the interests of both EU and UK alike for UK to crash out of the bloc without a deal. Although the EU refuses to commit on removing the irish backstop completely, it appears amicable in trying to reach a middle ground with UK. Therefore, we may see a compromise reached in the coming weeks which such a deal will eventually be able to push through the Parliament before a stipulated deadline.
However, extreme selling will occur if for whatever reason things go south quickly and UK crashes out. The GBP may decline by more than 5% within a short span of time due to market fears coming true. Hence, it is important for traders to thread this currency cautiously and manage their positions according to the unfolding saga. Wild swings can be expected to take out traders’ position with tight stop losses regardless of their intended direction.
From our last article on GBP, the fundamentals titled towards a bearish outlook and it was written before the release of the employment data. Though wage growth fell short of expectations last week by 0.1% in last week’s data release, the market still viewed it positively. This was because, wage growth remained resilient at 3.4% unchanged from previous period (its higest despite the ongoing US-China trade war and Brexit concerns. Moreover, unemployment also remained unchanged at 4.0%. In fact, both its unemployment and wage growth is currently at its strongest level since the mid 2009s.
Therefore, the outlook is now mixed and there is a possibility of upside in the pair given that USD may also slide further due to the recent US FOMC meeting minutes confirming its members’ dovishness.
However, traders should continue to be on the look out for any adverse change in the Brexit conditions and USD Fed stance next week as the political and economic situation in UK remains delicate.
Last week, GBP/USD resume its climb after 3 weeks of pullback with a clear bullish engulf candle formed. It shows that the support region of 1.2770 is strong and is able to halt the selling pressures present in the weeks preceding it.
However, the volume remains flat and the price is currently sitting at the resistance region of 1.3080 to 1.329. To go up further it must be able to gather enough strength to break the hard resistance level of 1.31465 and 1.32838. An improvement in Brexit conditions and US Fed dovishness may provide support for this break through.
Conversely, if the mentioned resistance regions holds well, we may see price revisit the strong support region of 1.2770 and 1.2660.
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