GBP/USD Daily Forecast – Sterling Rally at Risk as Brexit Deadline Looms

GBP/USD rallied to briefly trade above the psychological 1.30 handle on Monday. However, the pair failed to hold gains and is at risk of a bit of a correction as new risks have emerged.
Jignesh Davda

Vote on Withdrawal Legislation is a Lengthy Process

A vote on the latest Brexit deal was supposed to take place on Saturday. Instead, lawmakers opted to push through legislation required for an exit before voting on the deal.

The move was to ensure the United Kingdom is not forced out of the EU on October 31 without a deal if it was not able to pass legislation on time.

But the consequence is that lawmakers are now racing against the clock to vote on the EU (Withdrawal Agreement) bill. The current timeline for this doesn’t instill confidence that this will all get done in time for the October 31 deadline.

The Next Few Steps

The bill will be voted on later today after a second reading but there’s much more involved. Lawmakers will still have a chance to discuss changes to the bill and then another vote takes place on Thursday.

If all goes well during that stage, the bill then gets sent to the House of Lords on Friday. It doesn’t seem likely that they will get through it in one day. If it gets approved in the upper house, it will again get sent back to the House of Commons to be approved yet again.

At best the bill might wrap up early next week, that’s assuming it even gets voted through. Ironically, this is all quite meaningless if the actual deal gets voted down. Granted, the odds of the Brexit deal passing will tend to increase a bit if this withdrawal bill gets pushed through.

Assuming everything goes smoothly the Brexit deal could be voted on and passed before the deadline next Thursday. But considering the way things have evolved in the whole exit proceeding thus far, it’s hard to imagine things will go smoothly. As well, it’s safe to say opposition will try and delay at this stage to satisfy their own agenda.

For this reason, I think some new risks have emerged and the pound to dollar exchange rate could be susceptible to a correction.

Technical Analysis

GBP/USD is trading near a horizontal level at 1.2924 that could keep it bid over the near-term. If it were to break this level, I would expect that a larger retracement will take place.

GBPUSD Daily Chart

The level I’m watching to the downside in such a scenario falls at 1.2738. This level was important resistance in late May and through June. Further, the 200-Day moving average falls near the level to create a confluence.

Bottom Line

  • GBP/USD might correct lower as it appears the Brexit deal vote will be delayed longer than initially expected.
  • A break below 1.2924 might target the 200 DMA near 1.2738.
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