GBP/USD Daily Forecast – Sterling Under Pressure Ahead of Parliament Decision on Election

Today’s Vote to Weigh Heavily on Sterling

After an unsuccessful attempt yesterday, Johnson will try yet again on Tuesday to convince members of parliament to hold an early election. The big difference is, yesterday he needed two-thirds of the members to vote in his favor. Today, he needs a simple majority.

The markets appear a bit quiet as investors prepare for the Fed meeting later this week. The US will also release its latest jobs report later in the week which typically moves the markets. But this could be the quiet before the storm for the British pound.

The pound to dollar exchange rate is up nearly 5% month to date. This is attributed to declining concerns of a no-deal Brexit. Further, the UK came very close to finalizing an EU exit last week, and the markets appeared to be positioned that way.

An election in the UK stands to change that drastically. The opposition has already said that they will vote in favor of an election as long as the current Brexit deal is not ratified ahead of it. This essentially guarantees a Brexit delay to around January considering the election is to take place in December.

Further, if the opposition wins the majority, I suspect delays will extend well past January.

For this reason, I think the British pound is at risk of a larger downturn here. While the odds of a no-deal Brexit seemed to have declined since the start of the month, I don’t see a situation where GBP/USD holds on to roughly 5% month to date gain if Brexit is delayed till January.

Technical Analysis

A rally attempt in GBP/USD on Monday was met with sellers after a test of resistance. This resistance came from the upper bound of a declining trend channel that has encompassed price action since October 21. Further, the 50-period moving average on a 4-hour chart also came into play.

I expect the channel top will continue to offer resistance on rallies. If it fails to hold the upside, it could signal a return of the prior bullish trend. Although it might take another defeat in parliament for Johnson for this to materialize.

While below resistance, I have had my eye on support at 1.2738. The level carries confluence with the 200-day moving average and I think that might be the next stop for the currency pair.

Bottom Line

• The UK votes to have an early election later today.
• The outcome of the vote can trigger a volatile reaction in the British pound cross rates. An election will almost certainly remove the chance of an EU exit in the near future.