- The UK parliament is set to vote on Brexit deal on Tuesday evening with little hope for other scenarios than the rejection of the proposed agreement.
- Theresa May has already indicated the idea of the second referendum or a softer Brexit in case her deal is rejected.
- The chances of the second referendum or a softer Brexit is Sterling supportive as it is uncertainty that keeps Serling capped under 1.2800.
- The mix of the most important UK macroeconomic indicators are due in the second week of December but will be overshadowed by Brexit deal vote and further development.
- The FXStreet Forecast Poll turned bullish short term as a vast majority of forecasters expects the Brexit deal to be rejected and Sterling to shoot up short-term.
The GBP/USD was trading little changed over the first week of December opening at 1.2762 and closing at about the same level on Friday as the Brexit parliamentary debate heated up ahead of the parliamentary vote on the Brexit agreement on Tuesday, December 11. The GBP/USD opened the first week of December at 1.2772 and fell to new 2018 low of 1.2658 on Tuesday after the UK government was defeated in the UK parliament on Tuesday with lawmakers voting to give parliament more power over next Brexit steps if May's Brexit deal is voted down on December 11.
I was right to predict GBP/USD to test new 2018 low last week, and given the GBP/USD Brexit exhaustion the chances of GBP/USD breaking on the upside even with the Brexit voter failing to pass the UK parliament arise as the options of softer Brexit, or even new referendum are both rather Sterling positive.
The Bank of England Brexit agreement parliamentary testimony last week did not surprise anyone as the Bank officials basically repeated the message from the November Inflation Report. Governor Mark Carney repeated his blues of no-deal Brexit being an unlikely scenario for the Bank while confirming before the lawmakers at the Treasury Select Committee that the UK banks are prepared and well capitalized even for the possibility of no-deal Brexit.
The European Court of Justice (ECJ) also stepped in the Brexit process declaring that Article 50 of the Treaty of European Union allows the unilateral revocation of the notification of the intention to withdraw from the EU. That means that the UK could revoke Brexit if the Brexit agreement did not pass the UK parliament on December 11.
The UK Prime Minister Theresa May used the chance to increase the pressure on lawmakers saying it is either “my deal, no-deal or no Brexit at all” in her effort to convince the Conservative party Brexit hardliners she so desperately needs to meet 320 votes in the Brexit agreement voting on December 11 as only 226 voters are on her side by now.
Should the Brexit vote fail to confirm the Brexit deal, there are many possible scenarios of further action including:
1. Chaotic exit
2. General elections
3. Second parliamentary vote
4. No-confidence vote
5. Conservative party leadership challenge
6. Another referendum
The UK macroeconomic is playing a secondary role in the ongoing Brexit drama, but there were some positive signs on the macro front with manufacturing and construction PMIs jumping higher in November.
The UK construction PMI jumped to the highest reading in last four months of 53.4 in November, following the suit on manufacturing the also surprised on the upside in November. On the other hand, services PMI slumped lower at the brink of recession with the activity gauge falling to 50.4 in November, the lowest level since Brexit referendum in July 2016.
Even the calendar headline of the week, the US November labor market report did not spur Sterling to any bigger action as the US Dollar fell slightly lower with the headline non-farm payroll number at 155K in November coming out below expectations. The US wages though confirmed a steady path of 3.1% y/y increase and the US unemployment rate remained at 3.7%, both solid figures confirming Fed Chairman Powell's expectations of solid US labor market.
In the week ahead, the UK economy will report on all of the important economic indicators including monthly GDP, the UK manufacturing report and the UK labor market report for November. Although the macro data scheduled for next week are of the highest relevance, especially the UK labor market report, the Brexit vote on Tuesday next week is the most important event driving the direction for Sterling.
The European Court of Justice will release its ruling on Article 50 of the Treaty of European Union on Monday, December 10 at 8:00 GMT, one day before the UK parliament votes on Brexit deal negotiated by the UK Prime Minister Theresa May. Earlier this week the ECJ aide said the UK could unilaterally revoke Article 50 if it chooses so.
GBP/USD daily chart
The GBP/USD is moving within the downward sloping trend on a daily chart with Momentum and the Relative Strength Index pointing sideways in the neutral territory. The golden cross formation was invalidated over the first week of December with the crossover of a 50-day moving average above a 100-day moving average back indicating trend lower again. The GBP/USD formed a new 2018 low on December 4 and it is still capped in a sideways range of 1.2658-1.3300 that is in place since July 17. The Slow Stochastics made a bullish crossover in the oversold territory indicating further move upwards. While bearish mood prevails with UK parliament deeply divided about Brexit deal, the immediate target is 1.2658 on the downside. On the other hand, the GBP/USD currency pair needs to break above 1.2900 and 1.3000 to confirm bullish reversal should Brexit deal indicate softer Brexit of a new referendum, both factors rather Sterling positive.
The UK parliamentary vote on Brexit agreement prepared by the UK Prime Minister Theresa May is the most important event in the upcoming week. The vote is scheduled for Tuesday, December 11 and the actual voting is expected to come in the evening. On Monday, December 10 the European Court of Justice is scheduled to publish its ruling on Article 50 of the European Treaty. The ECJ aide already indicated that the ruling will give the UK government an independent will to opt for the revocation of Article 50.
On the fundamental side, the UK is scheduled to publish a wide range of economic indicators including UK manufacturing report for October, the UK trade and October monthly GBP on Monday. The most important macro release in the UK in the upcoming week though is the UK labor market report for November that is scheduled for Wednesday and expected to confirm the UK unemployment rate at 4.1%^ while wages are seen rising 3.2% y/y.
UK economic calendar December 10-14
On the other side of the Atlantic, the US inflation data, the Federal Reserve Chairman Powell's testimony and the US retail sales report headline the week.
The comments from the US Federal Reserve Bank officials recently all confirmed that there is a common view at Fed that the US economy is enjoying a very solid fundamental development justifying the December 19 rate hike. What is at stake for markets though is the outlook for 2019 with two-to-three additional rate hikes being the central market expectation for next year. The mix of possible economic slowdown and reluctantly slow inflation though gives markets plenty of reason to speculate. The oil price drop of 22% in November is definitely one of the drags on inflation while US-led trade war with China turns global market sentiment sour with equity market selloff this week one of the examples.
UK economic calendar December 10-14
The FXStreet Forecast Poll estimates GBP/USD to reach 1.2745, almost unchanged from last week's 1.2743. As the second week of December will face a parliamentary vote on Brexit deal, the FXStreet Forecast Poll bearish-to-bullish forecast ratio remained tight at 43%-50% switching from 50%-44% prevailingly bearish forecast last week.
Forecasts for 1-month ahead remains bullish expecting 1.2869, up from 1.2843 last week and down from 1.2951 expected two weeks ago. The share of the bearish forecasts rose to 36% from 31% last week and 20% two weeks ago and the bullish forecast decreased slightly to 48% from 50% last week and 53% two weeks ago.
The FXStreet Forecast Poll remained also prevailingly bullish for 3-month time expecting 1.2966, up from 1.2961 last week and 2 big figures up from 1.2763 two weeks ago. The share of bearish forecast rose to 41% from 34% last week and 26% two weeks ago and the bullish forecasts decreased to 51% compared with 55% last week and 61% two weeks ago.
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