GBP/USD Weekly Forecast: Sterling set to correct from November highs as Brexit saga continues

  • The GBP/USD seesawed last week with Brexit deal vote uncertainty slashing the rate down below 1.2700 and rebounding to 1.3000 thereafter.
  • The Brexit deal was rejected by a crushing 230 votes margin a House of Commons, but Theresa May managed to stay in power in a no-confidence vote.
  • Norway style of Brexit is the most likely scenario with British media giving it a chance of 50%.
  • The technical picture indicates potential building up on the downside, as Slow Stochastics remain elevated well into the Overbought territory.
  • The FXStreet Forecast Poll indicated the majority of GBP/USD forecasters leaning to the downside for the upcoming week.

It was a pretty volatile session for Sterling during the third week of January with the currency opening the week in mid 1.2800s just top fall all the way down below 1.2700 ahead of the Brexit deal vote in House of Commons on Tuesday just to recover to 1.3000 early on Friday last week.

The GBP/USD is still about 100 pips higher on Friday from the Monday’s opening level even after the Brexit deal was rejected by a crushing margin of 230 votes in UK parliament and the government of Theresa May survived a no-confidence vote on Wednesday.

Given the Brexit uncertainty, the upward movement on GBP/USD seems rather the relief from the selling pressure building up in the run-up to the Brexit vote with markets cheering the increased probability of a delayed and possible softer Brexit.

Although all Brexit related matters are in the stage of the media speculation, the chances of Norway type for divorce with the European Union is given 50% chances to materialize and that is the most welcome scenario for British business that fundamentally supports Sterling.

The macroeconomic data released over the third week of January saw UK inflation decelerating in line with the market expectations to 2.1% y/y in December while UK retail sales experienced the worst December in a decade falling -0.9% m/m and core sales stripping the basket off motor vehicle fuel falling -1.3% m/m.

UK three months to three months aggregated retail sales 

Source: Office for National Statistics

On the other side of the Atlantic, the economic calendar is paralyzed by the US government shutdown with only Bureau of Labor actively releasing the macro data, but nothing important came out to influence the markets much. The set of the US Federal Reserve officials was speaking out last week with the “patience” in relation to the rate hiking outlook becoming the unisono language.

The upcoming week will see the Brexit saga continuing with the UK government set to present a “plan B” for Brexit in the parliament, while the UK is expected to release the December labor market report. 

The UK unemployment is expected to remain stable at 4.1% in December with the key wage growth indicators expected to rise 3.3% over the year in three months to November.

The upcoming week is set to remain driven by the Brexit headlines with the macro data scheduled unlikely to have a dominant effect on the market. The technical picture indicates potential building up on the downside, as Slow Stochastics remain elevated well into the Overbought territory. 

Technical analysis 

GBP/USD daily chart

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 138.2% Fibonacci at 1.2980 remains the target on the upside.

Brexit calendar

21 January: The UK Prime Minister Theresa May will have to present her “plan B” to the UK parliament.

29 March: Official date of the UK supposedly leaving the EU. The date could be postponed if all European Union member states agree unanimously.

18 April: Last session of the current European Parliament. This date is important because of the European Parliament needs to approve the Brexit deal in a plenary session.

23-26 May: European Parliament elections, excluding the UK

2 July: Inaugural session of the new European Parliament, without members from the UK.

Statements from Fed officials in the week from January 14-18

The New York Federal Reserve President John Williams said on January 18:

  • The approach the Fed needs “is one of prudence, patience and good judgment”.
  • “The motto of data dependence is more relevant than ever”.
  • The US labor market is strong no matter how you cut it.
  • The challenge in recent years has been inflation that’s too low, not too high
  • Expects GDP growth between 2% and 2.5% in 2019.
  • Expects inflation to be at 2% this year.
  • 2018 GDP growth looks to have been robust 3%.
  • If growth goes above sustainable levels, higher rates “may well be called for at some point”.
  • The US partial government shutdown is creating “headwinds to growth”.

Chicago Federal Reserve President Charles Evans said for the Bloomberg TV on January 17:

  • Fed is at a good point for pausing in raising interest rates.
  • It is entirely plausible that the Fed could raise rates two times this year, could be less.
  • Tariff and trade issues do not have a great impact on the economic outlook.

Federal Reserve Vice Chairman Randal Quarles said on January 17:

  • Real US economic data are very strong.
  • US job creation in December was “very big number”.
  • Inflation is very well contained, especially with oil prices falling.
  • The financial markets recently reacting to doubt about the strength of global growth including China and Europe.
  • Markets now more attuned to downside risks but “core base case” scenario for the US economy is still very strong.
  • I am seeing some stretched valuations in equities, commercial real estate; but overall risk to US financial stability remains moderate.

Dallas Federal Reserve President Robert Kaplan said on January 15:

  • Patience on interest rates should last at least a quarter or two and should be a matter of "months" not weeks.
  • A call for patience does not necessarily mean the FED should stop raising rates altogether.
  • We are not ready to conclude yet that balance sheet policy needs any changes.
  • There is no “textbook” on Fed balance sheet rundown, it must be open to learning and ready to make adjustments if data like market liquidity point to a problem.

Kansas City Federal Reserve Bank President Esther George and a voting member of the FOMC said on January 15:

  • “It might be a good time to pause” on rate hikes.
  • Fed should proceed with caution and be patient on rate hikes.
  • Rates are not yet at neutral, though close.
  • Pause in normalization would give time to assess the effect of rate hikes so far.
  • It is unclear whether, and how much, the Fed's balance sheet trim is removing accommodation.
  • If inflation pressures emerge, more rate hikes could be needed.
  • Fed rate-setting panel will be focused on data when it meets in two weeks.
  • Fed needs to continually reassess how its balance sheet is affecting the economy.

The Minneapolis Federal Reserve President and a well-known monetary policy dow Neel Kashkari said on January 15 that he has not seen post-tax-reform repatriated cash delivering a boost to business investment.

The Federal Reserve Vice Chairman Richard Clarida said while talking to Fox Business on January 14: 

  • It is not the case that Fed policy is a headwind for US economy.
  • The US economy has good momentum; the Fed can be “very patient” this year.
  • December rate hike was the right decision.
  • Federal Open Market Committee will take policy decisions “meeting by meeting” as it sees that some global data has been softening.
  • The slowdown in global outlook is not yet “severe”, but would tend to impact the US exports.
  • “I won't hesitate” to adjust asset-portfolio runoff if needed.
  • “I don't see a recession on the horizon.”

Wek ahead in economic data

The UK economic calendar highlights the UK labor market report on Tuesday, January 22 with the unemployment rate expected to remain unchanged at 4.1% in December. The closely watched UK wage growth is expected to confirm a strong increase of 3.3% over the year for both regular and total pay.

In the US the economic calendar is limited to the releases from the Bureau of Labor statistics due to the US government shutdown. The weekly jobless claims data and the US homes sales headline as the US canceled its delegation for the World Economic Forum in Swiis Davos this year. 

The UK and the US economic calendar for January 21-25

FXStreet Forecast Poll

The FXStreet Forecast Poll remained short-term bullish with the spot rate of 1.288 expected in the 1-week horizon, up from 1.2785 last week. The majority of forecasters see Sterling rising (44%) compared with 39% of bearish and 17% of sideways projections.

The FXStreet Forecast Poll is slightly bearish for the 1-month ahead with GBP/USD seen reaching 1.2867, and 50% of bearish to 35% bullish predictions. That is down from 1.2799 expected last week and 44%-39% bullish-to-bearish forecasts.

The three months' forecast reflects rising Brexit uncertainty with average FX rate for GBP/USD seen at 1.2991, up from last week's 1.2867. Bullish forecasts reached 47%, down from 49% last week and bearish projections shank to 31% from 40% last week. The sideways trend was predicted by the largest portion of forecast at 22%.

FXStreet Forecast Poll

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