GBP/USD Weekly Forecast: “Make it-or-Break it” time for Sterling and Theresa May
|- Getting the Brexit agreement spurred massive Sterling volatility and the UK government shakeout with ministers stepping down and parliament about to call a no-confidence vote.
- The Brexit related headlines roiled the market with Sterling swinging up and down on a massive scale with little chances of Brexit agreement to pass the parliamentary vote and only GBP bearish choices left.
- The UK parliament is reportedly ready to call a no-confidence vote to Theresa May’s government next Tuesday.
- The FXSTreet Forecast Poll turned overly bearish expecting Sterling to drop below 1.2800 by the end of next week.
The GBP/USD faced a very volatile week during the third week of November with Brexit agreement on the table making it hard for the UK Prime Minister to pass through the parliament likely most likely facing a no-confidence vote on Tuesday, November 20. Possible loss of confidence comes at times of peaking uncertainty and that may weigh further on Sterling. I was right to predict the Hell's bells for Sterling.
Brexit news, therefore, overshadows the economic calendar events in the upcoming week with a no-confidence vote possibly coming and the European summit scheduled for Sunday next week. The risk factors are set to swing the GBP/USD massively, depending on a result.
While approving the Brexit agreement and surviving the no-confidence vote are expected to bring the GBP/USD back above 1.3000 level, a negative outcome is expected to weigh on Sterling testing first 1.2662 2018 low or even breaking lower in case of prospects of no-deal Brexit becoming the reality.
The Bank of England inflation hearing in the UK parliament and the US economic data scheduled for next week are of much lower importance for Sterling.
Getting the Brexit deal passed in the UK parliament will be a tough task for Theresa May. May will need 320 votes and currently, she is short of around 50 votes short to reach that majority with about 250 loyal conservative members of parliament.
So, if the vote fails the choices are of either hard Brexit no deal scenario, a second referendum or another General election.
All given choices are Sterling bearish.
Last week in a nutshell
The GBP/USD starter the third week of November with the gap of 50 pips to the downside opening at 1.2920 as the rumors of the UK government ministers ready to step down in the final phase of Brexit negotiations weighed on the currency.
The Bank of England Deputy Governor Ben Broadbent's comments failed to appease the free fall on Monday after he said that “if we were to leave without a deal, likely you would see currency fall” while stressing that reaching the deal is still the most likely outcome.
The GBP/USD fell as low as 1.2840 on Monday just to rebound towards 1.3070 in days following the announcement that the Brexit agreement text is on the table ready to be approved.
While the UK Government formally approved the Brexit agreement on Wednesday, the discussion in the UK parliament faced a hard criticism along with two ministers really stepping down the next day after approving the Brexit agreement in the Cabinet. Both the pensions Secretary Esther McVey and Brexit Secretary Dominic Raab resigned.
“Today, I have resigned as Brexit Secretary. I cannot in good conscience support the terms proposed for our deal with the EU,” Dominic Raab said on Thursday morning indicating that there is an ongoing dispute within the UK Cabinet about the Brexit deal.
The GBP/USD subsequently fell as low as 1.2722 on Thursday, marking the 2% daily slump, the biggest daily fall this year. Friday saw Sterling wobble around 1.2800 level with general US Dollar weakness giving it a boost to 1.2870.
The third week of November saw the most important economic data in the UK out having a negligible effect on the market in light of Brexit headlines.
The UK labor market data saw UK wages picking further up while the unemployment rate ticked from four decades low to 4.1% in October. The UK regular pay excluding bonuses rose 3.2% over the year reaching £493 per week in nominal terms. The regular pay was up 0.9% over the year in real, inflation-adjusted terms.
Total pay (including bonuses) increased in three months to September by 3.0% y/y accelerating to £524 per week in nominal terms, up from 2.8% y/y in the previous period. Total pay growth was the highest since May 2015 and it has increased by 0.8% over the year in a real, inflation-adjusted basis.
The UK regular pay growth
The UK inflation remained unchanged in October with headline inflation up 2.4% y/y in October and core inflation stripping the consumer basket off food and energy prices rising 1.9% y/y.
The UK retail sales were expected to correct the September fall in October, but failed to meet the market expectations and fell -0.5% m/m while core retail sales excluding motor fuel sales fell -0.4% m/m.
Technical Analysis
USD/GBP daily chart
The GBP/USD currency pair continues to slide lower in a downward sloping trend on a daily chart. The daily swings are massive over the course of last three days with daily ups and downs of 1% framed by 1.2722 on the downside and 1.3070 on the upside while the currency pair settled at around 1.2800. With Brexit deal about to be approved, the potential for the upside mounts as the Momentum and the Relative Strength Index both remain in the neutral while pointing upwards. The Slow Stochastics sliding lower in the neutral territory. Moreover, the golden cross of a 50-day moving average crossing over a 100-day moving average to the upside was formed on a daily chart indicating final trend reversal targeting 1.3060 before moving to 1.3380 and 1.3460 important Fibonacci level. Failure of Brexit deal to materialize should see GBP/USD fall towards 1.2660 first before testing 1.2100, the post Brexit referendum low before the upward correction started back in March 2017.
Calendar for the week ahead
The UK economic calendar is set to deliver the Autumn BUdget statement and the Bank of England parliamentary hearing. Nevertheless, the prospects of There May government facing either a no-confidence vote or failing to get the Brexit agreement approved by parliament are more imminent and increasingly Sterling bearish.
The housing market data and the US durable goods orders complement the economic calendar with the Brexit supernova outshining the economic data next week.
The US and the UK economic calendar November 19-23
FXStreet Forecast Poll
The FXStreet Forecast Poll estimates GBP/USD to reach 1.2794 next Friday, compared with 1.2938 last week. For the fourth week of November, the FXStreet Forecast Poll bearish-to-bullish forecast ratio switched to 62%-23%.
Forecasts for 1-month ahead remains bullish expecting 1.2884, that's a drop of one big figure from last week's 1.2985. The share of the bearish forecasts dropped to 36% from 53% a week ago and the bullish forecast increased to 52% from previous week’s 31%.
The FXStreet Forecast Poll switched to prevailingly bullish for 3-month time expecting 1.2959, the same level as last week, but down from 1.2986 two weeks ago and down from 1.3037 expected three weeks ago. The share of bearish forecast dropped to 35% compared with 54% last week and the bullish forecasts increased to 55% compared to 32% last week.
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