- GBP/USD has rebounded as the opposition moved to block a hard Brexit.
- The final stages of blocking a no-deal Brexit are eyed.
- Early September's daily chart is pointing to further losses.
- Experts bullish in the short-term but bearish afterward.
The rebel alliance has taken back control – and sterling surged. After dropping below 1.20, GBP/USD surged some 400 as parliament moved forward in blocking a no-deal Brexit. The final stages of the process, setting elections, and several data points are set to rock the pound now.
This week in Brexit: Opposition in control, the battle continues
The week began with GBP/USD dropping to a low of 1.1958 – the lowest since 2016 –as fears of a no-deal Brexit grew.
Things changed when it became clear that the opposition finally came together against the moves of prime minister Boris Johnson. His senior advisor Dominic Cummings – which came up with the Leave campaign's winning "Take back control" slogan – seems to have gone too far. The opposition teamed up with pro-Remain Conservative MPs and formed the so-called "rebel alliance."
The alliance first seized control of parliament's agenda, taking control from the government. GBP/USD began its ascent as markets realized that the fractured opposition was finally coming together. Cable peaked at around 400 pips above the lows.
It then passed a law that forces the government to seek a three-month delay to Brexit if parliament fails to agree on any other path by October 19. The House of Commons also rejected Johnson's request to hold new elections on October 15. The current law allows the PM to change the date of the polls after parliament approves the new polls. Johnson has said he would prefer to "die in the ditch" than to ask for a delay of Brexit. His words added to the suspicion that he may either change the election date or ignore the law. The opposition seized on the resignation of Jo Johnson – the PM's brother that cited the national interest for his stepping down – to show that nobody trusts the leader.
The 21 rebel Tory MPs – including two former chancellors and the grandson of Winston Churchill – were expelled from the party. Others announced they would not seek re-election in a turbulent week in British politics.
And the action continues.
Next in Brexit: Closing the door on the October 31 exit
The bill to force the government to seek an extension is scheduled to become law on Monday. The alliance initially said it would agree to new elections once it is enshrined in law, but as mentioned, trust is falling. According to current reports, MPs will not approve the government's second attempt to call elections for October 15.
However, they may agree to a later date – perhaps October 29 –only two days before Brexit but ten days after the government must seek an extension. In that scenario, a humiliated Johnson breaks his word, asks for an extension, and stays in power. If he breaks the law instead of his word, parliament can replace him with a Government of National Unity (GNU) that will ask for an extension. Another option is that he quits.
The opposition may also decide to wait out before setting an election date. Markets would like clarity and to see Brexit formally delayed. The more clarity – the higher the pound can rise.
Disappointing data, trade hopes
UK figures failed to impress as Brexit uncertainty is taking its toll. All three Purchasing Managers´Indexes (PMIs) fell short of expectations. The manufacturing and construction PMIs showed contraction while the services PMI came out at 50.6 – reflecting weak growth.
In the US, data was mixed. The ISM PMIs reflected a growing divided between the struggling manufacturing sector and the booming services sector. The Non-Farm Payrolls figures have been mixed as well – the economy gained only 130K jobs in August, but wage growth accelerated to 3.2% YoY.
Markets were relieved by the news that US and Chinese officials spoke on the phone and finally scheduled trade talks for October. The optimism that came out of Washington and Beijing pushed yields higher and helped the greenback recover.
Other UK events: GDP, jobs eyed
The UK publishes monthly Gross Domestic Product (GDP) for July on Monday. After the economy contracted by 0.2% in the second quarter and stagnated in June, a minor expansion of 0.1% is projected. Manufacturing Production figures are eyed as well.
Tuesday's jobs report is projected to show that the UK's labor market remains robust. Economists expect the unemployment rate to stay at a low level of 3.9% while wage growth carries expectations for 3.7% including bonuses and 3.8% excluding them – both are upbeat numbers.
Here are the upcoming UK macro events, as they appear on the economic calendar:
Any comments from the US and China on low-level trade talks may move markets. The current trade truce will likely prevail, with developments awaiting October's face-to-face discussions.
The US economic calendar kicks off in earnest on Thursday with Consumer Price Index (CPI) figures for August. After Core CPI surprised in July with an increase of 2.2% year on year, another rise to 2.3% is on the cards. The data feed into the Federal Reserve's decision in the following week. Subdued inflation was one of the reasons for the Fed's rate cut in July.
The consumer is in focus on Friday. Consumption is holding up the US economy, and that stood out in July with substantial increases on all measures. Markets expect weaker numbers for August – an increase of only 0.3% in the Control Group – the most significant gauge.
Last but not least, the University of Michigan's preliminary Consumer Sentiment Index for September will be of interest after August saw a sharp drop to 89.8 points – the lowest since 2016. An increase is on the cards now.
Here is the list of US events from the FXStreet calendar:
GBP/USD Technical Analysis
GBP/USD is now enjoying upside momentum on the daily chart. Moreover, it has finally crossed above the 50-day Simple Moving Average for the first time in many months – a bullish sign. The technical situation is improving, but the currency pair remains below the 100 and 200 SMAs.
Initial resistance awaits at early September's peak of 1.2350. It is followed by 1.2380, which provided support in mid-July. Next, we find 1.2420 that had the same role in mid-June. The next level to watch is 1.2520, which held GBP/USD down in late July. 1.2580 and 1.2650 are next.
Support awaits at 1.2250, which capped the pair in late July. Further down, we find 1.2210, which also held GBP/USD down in early August. The next level is 1.2150 that provided support in late August. 1.2065 was a swing low in mid-August and 1.2015 was the previous 2019 low, before GBP/USD hit 1.1958.
Unless the rebel alliance falls apart the pound may continue rising on hopes that the delay of a no-deal Brexit may turn into a softer Brexit – or perhaps no Brexit at all.
The FXStreet Poll is showing that experts are bullish in the short term but remain pessimistic in the longer term. Perhaps they see the current relief rally as temporary and a hard Brexit just a question of time. Only the short-term forecast has substantially changed since last week – upgraded.
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