GBP/USD Daily Forecast – Sterling Steady as UK Prepares for an Election

Markets to Switch Focus to the Fed

After struggling to ratify the latest Brexit deal, PM Johnson called for an election to be held in December in hopes of winning a majority. Johnson’s bill for a December 12 election was approved with a vote of 438-20 in the House of Commons yesterday.

There are some uncertainties that accompany an election. Although Johnson has gained popularity as of late, there is obviously no assurance that he will win a majority. At the same time, the markets don’t appear too concerned as the pound to dollar exchange rate has held steady above the 1.2800 level.

GBP/USD gained upward momentum in the first half of the month after it became clear that the UK was coming closer to reaching a Brexit deal with the EU. A big part of the rally is attributed to short covering from speculators that were pricing in the potential of a no-deal exit.

But in the second half of the month, GBP/USD has mostly traded sideways. The pair still holds a fairly strong bid considering an exit won’t materialize on October 31, but the question remains whether it can extend on its already 5% gain for the month.

Investors will switch gears at this stage as the Federal Reserve will meet later in the day. The central bank is widely expected to cut rates today and forward guidance will be important. I expect, similar to prior meetings, that the bank will want to remain data-dependent but will signal that further action will be taken if necessary.

Technical Analysis

GBP/USD has been consolidating higher over the past few sessions although I think it is important to note that momentum is lacking.

Late last week, a horizontal level at 1.2924 held the pair lower and I think this level will remain important if the pair continues upward.

To the downside, 1.2800 has seen a strong bid on several tests now. A break of it would confirm that the pair remains in the downtrend that started from the high printed at the start of last week.

Bottom Line

• The UK will have an election on December 12.
• The Federal Reserve meets later today. Volatility will likely rise as a result of the meeting.
• 1.2924 remains critical upside resistance.