GBP/USD Forecast: Bitter-sweet victory in Brexit negotiations brings the pre-Christmas Sterling lower

Brexit future is dominant topic for the Sterling markets. The European leaders formally agreed upon moving the Brexit negotiation into the second phase during the  European summit in Brussels. At the same time, EU leaders said the UK is bind to the EU legislation for the whole period of Brexit talks until formally leaving the block in March 2019.

This is a bitter-sweet victory for the UK Prime Minister Theresa May that has been trying very hard to have the Brexit negotiations moved from formalities like the UK-EU border, citizens rights, and the Brexit bill onto most relevant issues of trading relationships before the 2017 year end.

Similarly to last week, this time around the currency market reaction of the GBP/USD pair was negative in a sign of “buy the rumor, sell the fact” nature of the market.

The shape of the Brexit deal is by far most important factor for the currency market. This is also what the bank of England has been saying in its December policy statement. Regardless of the UK inflation exceeding the 1% tolerance band above 2% inflation target forcing the Bank of England Governor writing an explanatory letter to the Chancellor of Exchequer.

With all the important events this year over, whatever the Brexit or macro news from the UK,  the GBP/USD is likely to remain within the broader range of $1.3210-$1.3450 for extended, pre-Christmas and post New Year period of time.

GBP/USD daily chart

Brexit deal update

Whatever the deal with the EU, the UK Prime Minister Theresa May is having the toughest job on this planet. On one hand, she is expected to deliver on Brexit deal while negotiating with the EU, on the other hand, she faces a revolt within her own Conservative party at home.

No wonder that her position is shaky at times. And it is the political audience of the highest rank to give her a sign of respect and applause.  The EU leaders praised the progress of the UK-EU talks giving British Prime Minister Theresa May and gave her standing ovation for her effort in a last-minute dealing over the issue of keeping the UK-EU border open in Ireland in a world after Brexit. German Chancellor Angela Merkel praised Theresa May for making “good offers, which might make it possible for the EU27 to see sufficient progress”. How Machiavellistic...

But what has been agreed upon in Brussels isn’t  likely to meet similar applauding reaction in London. The EU summit formally agreed to move the Brexit talks to trade relationships but conditioned the move with the UK obeying the current status quo.

Negotiation for next few months will likely be about the transition period the UK seeks sticking to the existing the EU's rules as well as its financial obligations.
 
The deal between the UK and EU on transition period and the future trade must be agreed until October 2018 to give EU 27 government time to endorse the deal.

Technical picture
With GBP/USD being stuck to the downside at the beginning of last week, the helping hand to Sterling has been handed over by the US Federal Reserve. While Fed delivered a dovish rate hike projecting only short-term economic boost from the US tax reform, the inflation projections remained muted, resulting in a broad-based US Dollar weakness. Sterling rose to $1.3467 on Thursday morning, its highest level last week, unaffected by news of the UK Prime Minister Theresa May suffered a major revolt in the UK parliament. By the end of the week, Sterling lost all the gains ending near key support level of $1.3320 once again.

Technically the GBP/USD is now moving within range of $1.3320-$1.3450, both being Fibonacci 38.2% and 23.6% retracement lines of the uptrend starting on August 24 at $1.2770 and peaking on September 20 at $1.3660.

The technical oscillators are pretty neutral with Relative Strength Index on 4-hour chart just above 50 neutral line and pointing downward while Momentum is just below zero being neutral. The decisive jump of GBP/USD from $1.3320 key Fibonacci support higher on Wednesday and Thursday has brought the Slow Stochastics from the Oversold to the Overbought condition within one day only. Friday’s slide towards $1.3320 is signaling that the recovery on GBP/USD has been very fragile and the current sideways trend is likely to extend lower.
 
With Slow Stochastics moving lower from the Overbought condition, sideways move within correcting channel lower towards  $1.3250 and then $1.3210 could be expected.  Should $1.3320 strong Fibonacci support line hold, GBP/USD might face minor resistance at $1.3360 and $1.3400-$1.3450 hurdles next.

GBP/USD 4-hour chart

According to FXStreet Forecast Poll, the GBP/USD is being increasingly seen by analysts as a potential gainer, especially in the short-term horizon. Nevertheless, whatever the Forecast Poll result, the biggest part of the market analysts still expect the GBP/USD to move sideways with 1-month Bias being sideways for more than a half of participants in the FXStreet Forecast poll.

FXStreet Forecast Poll for GBP/USD

FXStreet Forecast Bias for GBP/USD

Macro update
During the pre-Christmas week, the final reading for third quarter GDP is due, with the UK economy seen rising 0.4% q/q while rising 1.5% over the year. Such performance places it to the bottom of the European countries and the Bank of England is well aware that the UK economy is losing steam. For the ranking of the European countries GDP in Q3 see link here.

The UK calendar for December 18-22, 2017

Data last week
As mentioned at the beginning of this Preview, inflation in November surprised on the upside in November. The Office for National Statistics said that the UK inflation accelerated to 3.1% over the year in November with the largest contributor being the airfares and rising prices for a range of recreational and cultural goods and services, most notably computer games.
 
With the UK CPI at above 1% tolerance band tracking 2% inflation target, the Bank of England Governor Mark Carney is set to write an explanatory letter to Philip Hammond, the UK Chancellor of Exchequer saying what are the means of the Bank to bring the inflation in the UK back into target.
 
On Wednesday UK labor market report in November saw the unemployment rate remaining at 4.3% while closely watched wages rose 2.3% excluding bonuses, slightly above expectations of 2.2% increase. The GBP/USD leaped off the daily lows before the UK labor market report and actually showed little-to-no-reaction after the data came out.

On Thursday, the UK retail sales report showed sales boosted by Black-Friday rose 1.1% m/m in November, beating the market expectations, but the GBP/USD remained mutes as the Bank of England decided to keep monetary policy unchanged, broadly sticking to projections presented in November Inflation Report.