GBP/USD Forecast: Sterling is heading south after rejection at 38.2% Fibonacci level

• The UK Prime Minister is in intensive talks on the domestic political scene with the opposition Labor party refusing to participate.
• Media reckon 50% chance of Brexit turning to Norway type of cooperation with the European Union.
• The GBP/USD is sliding lower after the euphoria bringing it to 1.3000 with further losses expected as UK retail sales fell -0.9% m/m in December.
• The UK Prime Minister is set to deliver a “Plan B” for Brexit by Monday next week.

The GBP/USD is trading little changed on the downside at around 1.2950 after touching the round big figure of 1.3000 overnight, the highest since November 15 last year. While Brexit deal is mired by uncertainty with the UK Prime Minister Theresa May seeking support for re-negotiating the Brexit deal after this week’s rejection in House of Commons, the main opposition Labor party refuses to participate.

Theresa May is expected to present a “Plan B” for Brexit deal on Monday with media giving a Norway type of Brexit 50% chance to materialize. Other options include joining the customs union, a scenario that a no-go for May, general election, a second referendum, and a no-deal Brexit.

Norway type of co-existence with the EU would assume keeping close ties with the single market and accepting customs EU’s regime seems to be the best way of getting a Brexit deal that the UK Parliament is likely to support.

For such deal to get done, the UK needs to ask the EU to extend the Brexit date beyond March 29 and reopen negotiations with the EU. Such scenario might work as the EU is reportedly willing to extend the negotiations period top 2020.

Technically, the GBP/USD broke away from the downward sloping long-term trend on the upside and rose to 1.3000 overnight. The GBP/USD faced stiff resistance at 38.2% Fibonacci retracement level of 1.2980 and it is heading lower with technical oscillators including Momentum and the Relative Strength Index flat on a daily chart. The Slow Stochastics is well elevated in the Overbought territory ready to make a bearish crossover indicating spot price to fall. The GBP/USD is expected to remain capped in a sideline trend with 1.2900-1.2800 targets on the downside while a 38.2% Fibonacci at 1.2980 remains the target on the upside.

GBP/USD daily chart