GBP/USD Daily Forecast – Sterling Eases Back from 5-Week High

A Volatile Week for Sterling

GBP/USD dropped to levels not seen since October 2016 this week only to reverse to a 5-week high as shifts in sentiment towards Brexit dominated the pair.

The main driver this week was a move to delay Brexit which investors viewed as lessening the chance of an exit without a deal. This drove the pound higher against all of the most commonly traded currencies earlier in the week.

What may come as a surprise is that Sterling is not the strongest weekly performer among the eight most popular currencies. The Australian and New Zealand dollar have advanced in the late week to lead the gainers list as risk appetite has improved. There appears to be progress in the trade war between the US and China, which has driven up demand for risky assets.

While there has been a bit of slowing in volatility, I expect the wild swings in Sterling are not over. As a result of a new bill this week, Johnson is expected to ask for a delay of the official Brexit deadline of October 31, if he is unable to make a deal by the middle of October. However, he strongly opposes this and commented: “I’d rather be dead in a ditch”. The comment suggests that the British PM has not thrown in the towel. However, it remains to be seen how he will circumvent the situation.

With politically driven volatility slowing, market participants will be shifting their focus to the August US jobs report, scheduled for release later today.

Technical Analysis

There is a fairly major level in play for GBP/USD at 1.2300. After rallying above it to trigger some stops, the pair is retreating towards it in early trading on Friday.

I expect this level to act as a line in the sand for near-term direction. A drop below could setup for a bit of a correction. The jobs report might determine a trend for the dollar into the end of the week, and in the absence of further Brexit developments, that should drive GBP/USD in the session ahead.

Bottom Line

• Volatility is slowing a bit after a wild week for the British pound.
• Today’s US NFP report stands to be the driver for fluctuations in the pair.