GBP/USD Forecast: Sterling basks in Boris' Brexit optimism, shrugs off reality, for now

"The plan is meant to be rejected" – that was the line of some opposition members in response to Prime Minister Boris Johnson's Brexit plan – but the EU has not dismissed the proposal. Not yet. A lack of an outright rejection – and the cautious support of hardline Brexiteers – counts as success. The pound has been able to hold its ground and even advance. 

Plan receiving cautious support at home

The gist of the government's Brexit plan is keeping Northern Ireland (NI) in a single regulatory zone with the Republic of Ireland – separating the province from the rest of the UK. The devolved NI administration, based in Stormont, would be able to change the territory's customs alignment every four years under the proposal. The plan – which many find difficult to comprehend – is dubbed "two borders, four years."

The Democratic Unionist Party (DUP) has given its blessing to the idea – despite the border it implies in the Irish Sea – an idea the party had previously opposed. A group of 28 Conservative hardlines – or "Spartans" – have also offered their cautious support. Labour MPs from constituencies that voted Leave may also get on board in supporting the plan in order to get Brexit finally done. 

Markets may cheer if Brexit is resolved and not kicked endlessly down the road. However, internal support does not guarantee success. 

No outright rejection in Brussels

Johnson claims that while some goods moving within the island of Ireland will be subject to customs rules – no physical barrier would be needed. All sides wanted to refrain from reestablishing border posts – a move that would endanger the peace. However, details on technological solutions are still lacking.

This dearth of detail – at least in the two out of three documents that were released – may result in protracted negotiations and perhaps an official No from the EU. European Commission President Jean-Claude Juncker has said that the plan has some problematic points but that talks are set to continue. 

It is hard to see Brussels accepting the plan without changes. However, there are reasons to be optimistic that both sides can work with the proposal as a basis for negotiations and strike a deal. However, the optimism may fade if the "Spartans" and the DUP reject these changes.

Johnson may find himself like his predecessor Theresa May – making an effort to appease the hardliners only to see them vote against the deal.

And that may send sterling down.

Brexit biting the economy and US developments

Uncertainty about Brexit – and also global trade – is weighing on the economy. The Markit/CIPS Purchasing Managers' Indexes are raising fears of a recession. The manufacturing and construction PMIs have been under 50 points for several months while the services sector – the UK's largest was expanding. That has changed in September as the fresh release has shown that Services PMI dropped to 49.5 – raising fears of a recession.

Traders will later shift their attention to the US ISM Non-Manufacturing PMI. Also across the pond, manufacturing is contracting while the services sector – and especially consumers – are keeping the economy afloat. The publication also serves as a hint toward Friday's Non-Farm Payrolls report.

See US Service Sector September PMI Preview: How slow is slow?

The US dollar has been on the back foot as investors are pricing in higher chances that the Federal Reserve will cut rates. Moreover, political uncertainty is adding to worries as the "Ukraine-gate" scandal develops and more Americans support the impeachment of President Donald Trump. Further developments are likely today and they may weigh on stock markets.

More Stock market crash has three drivers – and they are here to stay

GBP/USD Technical Analysis

GBP/USD has been trading in a narrowing range and the 50, 100, and 200 Simple Moving Averages are converging towards the current price. The technical picture is less bearish than it used to be. Nevertheless, it trades below all three SMAs. Momentum is flat. 

Support awaits at 1.2315 which provided support in late September. It is followed by 1.2230, which was a swing low in early September. Next, we find 1.2205, which was a low point early this week. Next, we find 1.2155 and 1.2110. 

Resistance awaits at 1.2340, which capped GBP/USD earlier this week and converges with the 50 SMA. Next, 1.2390 separated ranges in mid-September and remains critical resistance. The next level to watch is 1.2415 which provided support in late September.