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GBP/USD Daily Forecast – British Pound Reverses on Johnson’s Defeat

By:
Jignesh Davda
Updated: Sep 4, 2019, 10:48 UTC

GBP/USD reversed abruptly higher on Tuesday after lawmakers won a vote that will allow them to delay Brexit.

GBP/USD

Johnson’s Defeat Causes Sharp Swing Higher in Sterling

British Prime Minister Boris Johnson lost a critical vote yesterday, and in the process, has lost momentum in his plan to deliver an EU exit for British citizens.

It might never be known whether Johnson was bluffing or seriously considered a no-deal Brexit. Either way, it is unlikely that EU officials will take him seriously after Tuesday’s defeat. Understandably, the idea of a no-deal exit is a frightening prospect to many, but without the threat of it, it seems that much less likely that the EU will change its stance towards the Irish backstop.

The British PM has called a snap election in retaliation and a vote will take place today at 18:00 GMT. However, opposition parties are seeing through his attempt to circumvent yesterday’s ruling and it doesn’t seem likely that he will get his way later on today.

Ahead of Johnson’s election, the markets had been aggressively selling off the British pound. This sell-off was in response to the increased probability of a no-deal Brexit with Johnson as UK’s Prime Minister. Following yesterday’s events, the probabilities have lessened a great deal, although the risk of an exit without a deal remains. Sterling has responded in this manner, and I expect further gains if Johnson is defeated again today.

Technical Analysis

I think it is important to note that technical levels and areas tend to respond better when there isn’t a major fundamental catalyst in place. Ultimately, the markets will be figuring out the probabilities of a no-deal Brexit based on ongoing events, and reprice Sterling accordingly.

GBPUSD 4-Hour Chart

Nevertheless, there are some areas of interest on a 4-hour chart. The 200 moving average and a previously broken rising trendline come in just above 1.2200. I think that is the first level to watch overhead. Beyond that, there is some major resistance at 1.2300. The markets may make an attempt at the level to try and trigger stop losses that have likely accumulated above it.

Support for the pair is seen at 1.2150 where a horizontal level and the 100-period moving average on a 4-hour chart overlap to create a confluence.

Botton Line

  • Ongoing Brexit developments will tend to keep volatility high for Sterling pairs.
  • The next catalyst will be the vote for a snap election, scheduled at 18:00 GMT.

About the Author

Jignesh has 8 years of expirience in the markets, he provides his analysis as well as trade suggestions to money managers and often consults banks and veteran traders on his view of the market.

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