GBP/USD Forecast: Looks vulnerable as Boris' Brexit enters "flextension" limbo

"One way or another, we will leave the EU with this deal" – the words of Prime Minister Boris Johnson after failing to pass a motion that would enable leaving the EU on October 31. The chances of a no-deal exit in Halloween – horrifying for markets – is off the cards. The government announced that it puts Brexit legislation on pause – or in a "zombie state."

But what happens now? Uncertainty about the next steps is weighing on the pound.

Flextension floated in Brussels

The EU is expected to approve an extension to Article 50, with a "flextension" on the cards. European Council President Donald Tusk has floated the option of accepting a delay until January 31, 2020, but with an option to exit earlier. Brussels may allow the UK to leave beforehand if the House of Commons ratifies the Brexit deal.

Late January is the date stated in the official request Johnson sent – forced upon by the opposition's Benn Act. The EU may set another Brexit date, either earlier or later – but does not want to be seen as interfering in Britain's political process. France seems reluctant to approve another postponement, reflecting the exacerbation about the endless process – but will likely go along.

The EU may take its time, but an extension is already baked into the pound's price.

What will the UK do with the time?

The initial plan in 10 Downing Street seemed to be opting for elections. Three months is sufficient time to hold elections – perhaps on December 5 or 12 – and then vote on the deal again. According to recent opinion polls, Johnson's Conservatives are in the lead and Labour leader Jeremy Corbyn is seen as a weak opponent.

Elections without approving the deal increase uncertainty and may weigh on the pound. 

However, while the PM lost the motion program, his Withdrawal Act Bill (WAB) did receive the initial nod – and by a broader than expected margin. The House voted by 329 to 299 to back his deal in principle while his predecessor Theresa May failed to get Brexit through three times.

The 30-MP margin may tempt the PM to go through with the process – even if takes longer than he wanted. If he succeeds, he may go to the polls as the leader that delivered Brexit – beating competition from Nigel Farage's Brexit Party. 

Providing certainty by completing the legislative process is pound-positive. 

Yet there is a reason Johnson preferred a quick process – pressuring MPs to back the deal without significant scrutinizing. If the process continues and the economic assessment is released, some parliamenterians may cool their enthusiasm. Moreover, they may also table amendments such as a customs union – materially changing the accord and forcing new negotiations with the EU.

Another amendment is conditions support on a second referendum – where voters may back remaining in the bloc. While undoing Brexit is investors' preferred outcome, the chances are low. 

At the time of writing, uncertainty keeps sterling capped. 

Beyond Brexit, there is little going on to affect GBP/USD – Brexit continues having an outsized impact on other currencies. Nevertheless, developments around US-Sino trade talks are of interest. Recent reports suggest little progress has been made, and tht adds to the risk-off mood. 

More Parliament approves Brexit, hedges on departure date

GBP/USD Technical Analysis

Upside momentum on the four-hour chart has all but evaporated. GBP/USD has lost the uptrend support line that accompanied it since October 10 – another bearish sign. The 50 Simple Moving Average currently hits the price at 1.28 – a round number that also held cable down early last week. This level is critical support now.

Immediate support awaits at 1.2840, which is the daily trough. Below 1.28, the next level to watch is 1.2750, which provided support on the way up, and 1.2706, which was a peak in mid-October. 1.2655 and 1.2580 are next.

Resistance awaits at 1.2895, which is the daily high, followed by 1.2940 that provided support when the currency pair traded at high ground. Last week's peak of 1.2989 and the five-month high of 1.3013 are next.