GBP/USD Forecast: 4 scenarios for the critical Brexit Day and levels to watch

GBP/USD is trading above 1.3200 after a 300-pip recovery on Monday. Fraught negotiations over the weekend turned into a late-night deal. UK PM Theresa May and EU Commission President Jean-Claude Juncker announced a new agreement on the Irish Backstop. 

May said that the new agreement includes legally binding changes, allowing the UK to exit and not be "trapped" in the EU's Customs Union. An arbitration mechanism and further assurances that the EU does not want the backstop have been added. A legally binding option to exit the Backstop is critical to the support of Conservative Brexiteers and the Northern Irish DUP party.

And is it legally binding? Some hard-line Brexiteers such as Steve Baker say it isn't and the opposition Labour Party dismisses the new accord by saying it has not changed anything.

The real arbitrator is Attorney General Geoffrey Cox. The pro-Brexit MP legal expert is trusted by supporters of Brexit.

Scenario 1: Cox approves, Parliament approves

 If he backs the deal and says it is legally binding, Parliament may finally pass the accord, and the UK will smoothly leave the EU on March 29th, 17 days from now. 

In this scenario, GBP/USD is set to extend its gains quite significantly on the high level of certainty that will finally be achieved.

GBP/USD has room to rise to 1.3500 in this case.

Scenario 2: Cox approves, Parliament rejects

 If his words do not convince enough MPs and the government is defeated by a small margin, there may be another meaningful vote and hopes will remain high that some Labour MPs will come around to supporting this soft Brexit over uncertainty.

In this scenario, GBP/USD retreats from the recent gains but does not fall that much, as hope for approval will likely keep the pound bid.

GBP/USD could fall to 1.3000 but consolidate ahead of further developments.

3: Cox rejects, Brexit delayed

 If he says it is not good enough, May may suffer another crushing defeat and uncertainty will be even higher. In theory, Parliament is set to vote on Wednesday on leaving without a deal, and most likely reject this option. And then, on Thursday, they will vote on a potential delay to Brexit. The length of the extension is unknown at this point, especially given the upcoming elections to the European Parliament. In any case, it is hard to believe a delay will do much to resolve the issues.

In this scenario, we can expect a downfall in the immediate term, but the pound may recover and even shoot higher, especially if Brexit is postponed beyond three months. It could turn into the most favorable outcome for Sterling bulls, but not today. It may be a buying opportunity.

GBP/USD may take a deep dive below 1.3000 before eventually climbing towards 1.4000

4: Cox rejects, Anarchy in the UK

Upon a huge defeat, May may resign or may be ousted. It will then be unclear if Parliament moves forward with extending Article 50 or the UK stumbles out of the EU without a deal, a highly-damaging scenario for the economy. 

In this extreme scenario, the pound collapses with the government and 1.20 may seem quite real. 

There are additional scenarios which are hard to predict under the quickly-shifting sands of UK politics.

Apart from Brexit, the UK releases GDP data for January and the US publishes inflation data. These publications may have a short-lived impact on pound/dollar, but it's all about Brexit.

GBP/USD Technical Analysis

We are using the daily chart given the higher volatility. 

With the recent move, GBP/USD surged above both the 50-day and 200-day Simple Moving Averages. Momentum is positive and the Relative Strength Index is rising but below 70. All in all, the bulls are in control.

1.3300 is not only a round number but was also a peak in September. 1.3350 was the high point in 2019 and 1.3375 was a swing high in the summer. 1.3480 held it back in June 2018 and 1.3620 capped a recovery attempt in May last year.

Looking down, 1.3175 was a peak in November and 1.3150 was a battle line in recent days. 1.3110 held it down in mid-February and 1.3060 capped it just before the recent surge. 1.3110, 1.2960, 1.2895, and 1.2830 are next.