- GBP/USD has kicked off the week with a mild drop after messy weekend developments.
- Events in parliament are set to rock sterling, which has reasons to rise.
- Monday's four-hour chart is showing a bullish uptrend support line.
With Yellowhammer, three letters to the EU and a meaningless vote on Super Saturday – it is no wonder that there is profound confusion over Brexit. However, the weekend's developments are mostly positive.
Parliament forced Prime Minister Boris Johnson to ask for an extension to Brexit. While he stressed he does not want one and refused to sign the letter, the EU is considering it. The all-but-certain avoidance of a no-deal Brexit is good news for the pound.
Positive Brexit developments
The bloc is unlikely to respond immediately but rather wait for developments in parliament. After the government pulled the Meaningful Vote (MV) on Saturday following the Letwin amendment, it may be unable to introduce it once again. House Speaker John Bercow is set to disallow another debate and the government will move to introduce the more-detailed legislation 0 the Withdrawl Act Bill (WAB).
That will probably take place on Tuesday and according to various number crunchers – Johnson is on the verge of mustering a majority for the deal. That is also good news for markets that want more certainty. In case parliament rushes through the deal, the EU will not grant an extension and the UK will leave the EU on October 31. Certainty is good news for sterling.
Another pound positive development comes from the benches of the opposition once again. Labour is seeking new alliances, including with the Northern Irish Democratic Unionist Party (DUP).
Amendments to the WAB may include a customs union – practically voiding the deal which leaves Great Britain out of the EU's arrangements. The DUP rejects Johnson's deal due to the separation between Northern Ireland and the rest of the UK. In that case, both the government and the opposition may decide elections are necessary to break the deadlock and Brussels is set to allow time for it.
Another amendment is conditioning support for Johnson's deal on a confirmatory vote – a second referendum. In that case, no-deal will be 100% removed and the option to remain – what markets desire – will become a viable option once again.
All in all, the chances of a no-deal Brexit are falling and the chances of either Johnson's deal or Remain are rising.
For more detail, see Three positive Brexit developments
The US Dollar remains on the back foot after weak Retail Sales data last week and rising prospects for the Federal Reserve to cut rates next week. A light economic calendar means the focus remains on the next political moves. Moreover, Brexit has a growing impact on other currencies, overshadowing other market developments.
The technical chart is also favorable.
GBP/USD Technical Analysis
GBP/USD has been trading alongside a steep uptrend support line since mid-October, and the recent falls have only strengthened it. The Relative Strength Index has dropped below 70 – thus exiting overbought conditions. The pair trades above the 50, 100, and 200 Simple Moving Averages on the four-hour chart and momentum remains positive.
Initial resistance awaits at 1.2945, which is the daily high. It is followed by Thursday's peak of 1.2989 – a five-month high. Next, we find lines dating back to the spring. These include 1.3045, 1.3080, and 1.3135.
Support awaits at 1.2895, which was a temporary peak on the way up, then by 1.2800, which had the same role, and 1.2750, a support line last week. 1.2705 and 1.2655 are next.
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