GBP/USD Daily Forecast – Sterling Edges Lower After Sharp Surge

Sterling is Poised for a Volatile Week

GBP/USD broke to a 3-month high last week as investors saw the odds of a no-deal Brexit declining. The shift in investor sentiment came after a joint statement from UK PM Johnson and Irish Prime Minister Leo Varadkar who said they saw a “pathway for a potential deal”.

News over the weekend sours the optimism a bit as EU and UK officials have both said that there is still quite a way to go to secure a deal. With time running down, the Sterling pairs are poised to have a volatile couple of days.

The UK is scheduled to leave the EU on October 31, even if a deal is not secured. Currently, it looks like they will request an extension rather than leave without a deal.

Negotiations End Wednesday

But more important than the October 31 deadline, a deal should be agreed on at the EU summit which starts on Thursday. That means negotiations should be completed by Wednesday so that a decision can be made during the summit. UK parliament then holds a rare Saturday meeting to decide what to do next.

In this context, there are only three days left, including today, for an orderly exit. If a deal is not made, it will introduce all sorts of uncertainties. It is still unclear why PM Johnson insists the UK will leave without a deal even though he legally has to ask for an extension if he is unable to secure a deal. The only way around this point is if he can convince parliament to go along with his plan which seems unlikely.

Further, the UK is likely to have an election if a deal is not made, in an attempt to break the impasse. Also, even though the law states a three-month extension will be asked for, this can easily change to a longer or shorter time frame. It is important to note that EU officials will need to unanimously agree to the extension.

The British pound will be sensitive to ongoing headlines over the next few days. The Queen’s speech takes place today. However, it is not expected that any major announcements will be made that will cause drastic shifts in GBP/USD.

Technical Analysis

The rally in GBP/USD on Friday was capped by the 1.2700 handle and the pair has been moving lower since. There seems to be a general lack of buying as the decline has been persistent although it is lacking momentum.

Support for the pair at 1.2575 has broken but how the pair trades around this level will be important for the session ahead. I suspect a push back above it could lead to another attempt to scale above 1.2700.

If the level fails to hold, the next area of support I am watching falls at 1.2486. Generally speaking, I think the pair will remain bid considering there was a premium priced in for a no-deal scenario. While that is not off the table, it certainly does not seem wise to position for it at this time.

Bottom Line

• Volatility is likely to increase even more as the clock winds down for Brexit negotiations.
• Negotiations will complete on Wednesday, ahead of the EU summit.