GBP/USD Daily Forecast – Sterling Rallies on Shifting Brexit Expectations

After a series of defeats for UK Prime Minister Johnson, the odds of a no-deal Brexit have declined and the British pound has recovered sharply higher.
Jignesh Davda

Johnson To Request 3-Month Extension to Brexit Deadline

It’s been a rough week for the British Prime Minister and his plans for UK’s departure out of the EU. While he started the week out saying that he will not, under any circumstances, ask for an extension of the Brexit deadline, that is exactly what he might end up doing.

Earlier this week, lawmakers paced a bill that would effectively allow them to delay the Brexit deadline of October 31st. Johnson attempted to fight this by calling a vote for an election yesterday but was not successful. The PM had argued on several occasions that having a no-deal option on the table offers him leverage. That is no longer the case with the new bill as a nearby deadline is no longer looming.

To be clear, there is still a possibility of an EU exit by the end of October. However, considering this week’s events, it seems less likely that EU officials will adhere to Britain’s request surrounding the Irish backstop. Johnson will continue discussions, and if he is unable to reach a deal by the middle of October, the PM will need to request an extension.

Fears of a no-deal Brexit had dominated Sterling ahead of this week. The Prime Minister has always been clear that not reaching a deal is not going to stop him from delivering an exit. The situation has changed drastically as the rug has been pulled out from under him. In reaction, Sterling has rallied against all of the popular currencies and is on pace to post the strongest weekly gain among them.

Technical Analysis

Some significant resistance has broken in GBP/USD. As indicated in yesterday’s forecast, there is a major fundamental shift taking place and Sterling strength is not likely to be hindered by technical levels until the markets have repriced the exchange rate according to new Brexit probabilities.

GBPUSD 4-Hour Chart

Having said that, there is an interesting level coming up in GBP/USD at 1.2300. This level was major resistance in August and it is likely that the market will gun for the stop losses that have likely accumulated above the level. The next area of interest to the upside comes in at 1.2373. This level represents a spike low printed early in the year.

Often the markets will trigger stops and pull back a bit. That is certainly a possibility at this stage. However, the upside momentum is strong and there remains a significant risk for short-sellers.

Bottom Line

  • Sterling continues to rally as the market readjusts for new probabilities for a no-deal Brexit.
  • GBP/USD is on the verge of breaking to a five-week high. The British pound is outperforming all of its major counterparts.
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