GBP/USD Weekly Forecast: Sterling set to profit short-term from prospects of softer Brexit

The GBP/USD rose more than 2.2% over the fourth week of January breaking the key resistance level of 1.2990-1.3000 as the market was hoping for delayed Brexit and DUP’s support for a “Plan B” for Brexit has provided Sterling solid support.

Although there was no much new on the Brexit front with the UK Prime Minister Theresa May giving up the political coalition talks while seeking the support of partners in the European Union with about a third of the government officials heading to World Economic Forum in the Swiss town of Davos for a high-fly presentation. The key event of the upcoming week will be the House of Commons vote on amendments to the Brexit deal to confirm so-called “Plan B” for Brexit. The approval is seen boosting Sterling further after a recent breakout from the long-term downtrend. 

The economic fundamental published over the fourth week of January concentrated to the UK labor market, that has proven the strength of its “muscle” with the unemployment rate dropping back to a four-decade low of 4.0% while the regular pay in the UK increased above expectations by 3.4% in three months to November.

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• Central Bank Envy: The ECB and the Bank of Japan gaze longingly at the Fed

Technically the GBP/USD broke important Fibonacci resistance level at 1.2990-1.3000 and rose up to the weekly highs of 1.3165  on Friday backed by reports of DUP reportedly set to support the Brexit deal vote with “tougher” stance on the Irish backstop. The break above the 38.2% Fibonacci retracement of the upmove from 1.2130 to 1.4177 means that positive Brexit headlines have a massive FX market impact in support of Sterling. With former resistance level becoming a support line, the GBP/USD is set to bounce off the 1.3000 level and target higher highs.

With lack of important data set scheduled for the fifth week of January and the US calendar featuring the all-important US employment report next Friday, the chances are for Brexit hopes to see Sterling rise further with correction lower backed by supposedly strong US labor market report. The first estimate of the US fourth-quarter GDP is expected to be delayed due to US government shutdown, making Federal Reserve’s meeting and the US labor market report the most important events of the final week of January.

While the US Federal Reserve is expected to confirm its language of “patience” in its statement on Wednesday, the US non-farm payroll is expected to deliver strong numbers once again for December.

While the economic fundamentals favor the US Dollar in the upcoming week, hopes for delayed Brexit and feeding in and the GBP/USD. The UK opposition Labor party said it will trigger a second Brexit referendum while seeking support in European grounds. 

The European Commission’s Commissioner for Economic and Financial Affairs, Taxation and Customs Pierre Moscovici said on Wednesday last week that the EU supports the idea of the second Brexit referendum saying it would be fully “legitimate”. Moreover, the EU chief Brexit negotiator Michel Barnier said the EU is ready to negotiate should the UK make compromises on the red lines.

The Northern Ireland junior coalition DUP party privately agreed to support Theresa May’s “Plan B” Brexit deal when she “toughens it up” ahead of crunch Commons vote. The news supported Sterling that rose to a fresh 11-week high of 1.3139 against the US Dollar. 

The UK regular pay growth rate

Source: Office for National Statistics

Technical analysis

GBP/USD daily chart

Technically the GBP/USD jumped above downward sloping trendline and with breaking above 1.3000 it has also conquered the major resistance line representing 38.2% Fibonacci retracement of the upmove from 1.2130 to 1.4177.

The technical oscillators including the Relative Strength Index and Slow Stochastics are both elevated with Slow Stochastics making the bearish crossover in the Overbought territory. The GBP/USD rose to a fresh 11-week high of 1.3156 on Friday. The bullish breakout of the Fibonacci level of 1.2990-1.3000 becomes a support level now and the first price target on the downside.  On the upside, the immediate resistance is at around 1.3200 and 1.3300 next.

The week ahead in economic data

The US economic calendar is influenced by the US government shutdown and the US Commerce Department encompassing both the Bureau of Economic Analysis and the Census Bureau are both closed. The publication of the US fourth-quarter GDP estimate and the personal income and expenditures data is therefore canceled.

The headline on the macro front is the Federal Reserve´s meeting due on Wednesday that is not expected to change the rates, but markets are eager to price in the outlook for rates that the officials expressed as ¨patience is needed¨ in further policy adjustments.

The Federal Open Market Committee is expected to repeat the message from December minutes that said: “Many participants expressed the view that, especially in an environment of
muted inflation pressures, the Committee could afford to be patient about further policy firming.”

Moreover, the Federal Reserve chairman Jerome Powell said: “We’re in a place where we can be patient and flexible and wait and see what does evolve, and I think for the meantime we’re waiting and watching.”

Also, the Federal Reserve´s Vice Chairman Richard Clarida recently said that “with inflation muted, I believe that the Committee can afford to be patient as we see how the data evolve in 2019.”

Besides the Fed meeting, the most important economic release is scheduled for Friday, February 1 with the US labor market report. The number of new jobs opened in December is expected to reach 168K in December after 316K in November while the wages are seen rising 3.2% over the year and the unemployment rate at 3.9%.

The US economic calendar for January 28-February 1

In the UK, the most important political event is scheduled for Tuesday with the UK House of Commons voting on Brexit deal amendments to enable Theresa May´s ¨PlanB¨ for Brexit to succeed. With the support of the junior colation partner, the Northern Irish Democratic Unionists the new proposal might win a go, that would support Sterling strongly across the board.

Apart from this, only the less important macro data are due with the UK manufacturing PMI headlining the upcoming week with deceleration to 53.5 expected by the market consensus.

The UK economic calendar for January 28-February 1

FXStreet Forecast Poll 

The FXStreet Forecast Poll remained short-term bearish with the spot rate of 1.3086 expected in the 1-week horizon, up from 1.2885 last week. The majority of forecasters see Sterling falling (53%) compared with 40% of bullish and 7% of sideways projections.

The FXStreet Forecast Poll turned bullish for the 1-month ahead with GBP/USD seen reaching 1.3039, up from last week´s 1.2867. The share of bullish forecast swung to 50%, up from 35% last week. The share of bearish forecasts fell to 44% from 50% last week.

The three months' forecast reflects rising Brexit uncertainty with average FX rate for GBP/USD seen at 1.3116, up from last week´s 1.2991 and up from two weeks ago of 1.2867. Bullish forecasts reached 42%, down from 47% last week and bearish projections increased to 49%, up from 41% last week. The sideways trend was predicted by 9% of forecasters, down from 22% last week.

FXStreet Forecast Poll