- GBP/USD has extended its gains as a hard Brexit fades away.
- Brexit developments and rate decisions stand out in the upcoming week.
- Mid-September's daily chart is pointing to further gains.
- Experts see a short term rise and a fall later down the road.
"He bravely ran away" – is a quote from Monthy Python's sketch about "Brave Sir Robin" – and it serves as a description to what opposition politicians are doing. While they seem closer to succeeding in avoiding a no-deal Brexit, they are bitterly divided on what they want. The pound has cheered the recent developments Apart from further political developments, rate decisions on both sides of the Atlantic stand out.
This week in Brexit: Closer to kicking the can down the road
The bill to prevent a no-deal Brexit without parliament's consent has become law after the Queen gave it the Royal Assent. Moreover, parliament has thwarted prime minister Boris Johnson's attempt to hold elections on October 15. The opposition has thus succeeded in forcing the government to ask for a delay of Brexit on October 19 – but there are doubts if Johnson will obey the law.
John Bercow, Speaker of the House of Commons, has announced he will be stepping down by the current day, October 31, unless elections are held. Bercow compared breaking the Brexit bill to robbing a bank – adding pressure on the PM.
Legal issues also come from the Scottish High Court, which has ruled the suspension of parliament as "null and of no effect." The judges in Edinburgh contradicted rulings by courts in London and Belfast that ruled in favor of the government. The UK Supreme Court will have the final say next week.
The EU must accept an extension. While some leaders have said that there is no reason to extend Brexit, a draft EU resolution explains that the bloc should allow Britain more time. The cases for granting an extension include an election, a referendum, but also to avoid a no-deal Brexit. A hard exit would hurt the EU and even the UK. The government finally released its "Yellowhammer" documents which detail the base case scenario of what would happen without an accord. There are warnings of medicine shortages, a lack of fresh food, long queues of trucks, and also public disorder. Officials claimed it is only a "worst-case scenario," but these claims were rebuffed.
Other events: UK data, US-Sino detente
In the meantime, the UK economy is doing well. Gross Domestic Product expanded by 0.3% in July, after stagnating in June. The Unemployment Rate dropped to 3.8%, and wage growth accelerated to 4% in July – both better than expected.
In the US, data have been mixed. Core Consumer Price Index (CPI) has accelerated to 2.4% in July, while retail sales figures met expectations.
The US and China have come closer – at least to an "interim" deal. President Donald Trump is considering an accord which will include some tariff reductions as warnings of a recession mount ahead of the elections next year. Markets have cheered these reports and Trump's announcement of a delay in new duties. China has allowed companies to buy agricultural goods – also adding to a better atmosphere.
UK events: Brexit noise, BOE decision
The UK Supreme Court is set to make a final decision on parliament's suspension – called prorogation – on Tuesday. The judges are expected to reject the case and keep the House closed until October 14. While the opposition wants to debate Brexit, they may regret this wish.
There are significant divisions between those wanting to revoke Brexit, other supporting a second referendum and many who want an orderly Brexit. So far, they have been united, but this may not last. If Johnson surprises with ideas for a new deal, it may break up the "rebel alliance."
One such idea is to have separate rules for Northern Ireland – something the Democratic Unionist Party (DUP) opposes. Both the current PM and his predecessor Theresa May have relied on the DUP for support. However, Johnson lost his majority and may find Labour MPs in Leave-voting areas willing to support a new deal. That may put the main opposition party at odds with itself and with the pro-Remain Liberal Democrats.
The economic calendar features the Consumer Price Index (CPI) figures on Wednesday. In normal times, inflation figures would rock the pound – especially ahead of the rate decision by the Bank of England. However, these are abnormal times. Nevertheless, a surprise may impact the pound. Headline CPI is expected to slow from 2.1% to 1.9% – sticking around the BOE's 2% target.
Just hours before the bank announces its policy, British retail sales for August are due out. The UK is expected to report no change in the volume of sales in August after a modest increase of 0.2% in July.
And finally, the BOE is expected to leave interest rates unchanged at 0.75%. The bank has stated that it would like to increase rates as the wages are rising and to have more firepower for a future recession. However, Brexit has paralyzed policymaking also at the central bank. Mark Carney, Governor of the Bank of England, has hinted that he may cut rates in case of a hard Brexit. A unanimous vote to leave rates unchanged is on the cards.
Here are the upcoming UK macro events, as they appear on the economic calendar:
US events: All eyes on the Fed
Investors expect the Federal Reserve to cut rates for the second time in a row. While the previous reduction in July was labeled an "insurance cut," the worsening global outlook has led Fed officials to signal another move. The base case scenario is for a standard cut of 25 basis points, while some have rejected the intention to reduce rates and others want a 50bp cut.
Assuming Jerome Powell, Chair of the Federal Reserve announces a standard cut; the reaction will likely depend on the Fed's forecasts for future rates – aka the "dot plot." Markets will be assessing the chances for another rate cut in October and December. A moderate path of cuts will likely keep the dollar bid while an aggressive one will probably weigh on it.
For all the details, see Fed Preview: Far more than a rate cut – Five scenarios for the dollar
Trade talks are also of high interest. If Trump warms up to a partial deal, markets will likely cheer, and the greenback may struggle on the "risk-on" sentiment. If angry rhetoric from both Washington and Beijing replaces the gestures of goodwill, the dollar may rise.
Other US economic releases such as building permits, housing starts, existing home sales, and industrial output may all move markets, but considerable surprises are needed to shift attention away from the Fed decision and trade.
Here is the list of US events from the FXStreet calendar:
GBP/USD Technical Analysis
The daily chart is showing that GBP/USD has broken above an uptrend resistance line that began in early August. If confirmed, it is a bullish development. It has breached this line after breaking above downtrend resistance earlier. The currency pair enjoys upside momentum and trades above the 50-day Simple Moving Average.
All in all, the technical picture is bullish.
Fierce resistance awaits at 1.2525, which is the confluence of a support line dating back to June, a resistance line from late July, and the 100-day SMA. Next, we find 1.2580, which held GBP/USD down in mid-July. The next cap is 1.2655, which provided support in late June, and 1.2780, that capped it around that time.
Support awaits at 1.2420, which provided support in late July, followed by 1.2380, which had a similar role beforehand and also capped GBP/USD in early September. Next, we find 1.2310, that capped GBP/USD in late August. Further down, 1.2210, was a stubborn resistance line in early August. It is followed by 1.2150, 1.2015, and 1.1958 – the 2019 low.
As long as the opposition stays together and Johnson fails to provide Brexit solutions, markets will continue seeing Brexit delayed and the pound may rise. If the rebel alliance breaks down, the pound may fall. The Fed will also play a role, but Brexit remains the main topic.
The FXStreet Poll is showing a bullish trend in the short term but significant falls afterward. It seems that experts still see damage from Brexit – whether it happens or not. The short-term target has been downgraded while the medium and long-term ones have remained mostly unchanged.
- EUR/USD Forecast: ECB done, Fed to come
- USD/JPY Forecast: Fed in focus after another week of trade optimism
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