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GBP/USD in focus: Brexit/Fed variables keeping traders on their toes and making for volatility into year-end

  • GBP/USD's advance stalled on Monday in London, tumbling from the highs of 1.2701 and right back to 1.2636 where the 21 and 200-hr SMAs meet at 1.2636.
  • Cable's trajectory is dependent on Brexit headlines and the mood surrounding the outlook for the Federal Reserve's, (Fed), course of action with respect to its interest rate policy.

The US dollar has been in the balance of whether the Fed will be making policy even more data dependent and whether we will see a decline in the 2019 median dot to two hikes from three. The Fed is expected to raise the target range for Fed funds to 2.25%-2.50%.

  • Riksbank Preview: Rates going up in December? - ING
  • FOMC: Policy likely to be even more data dependent - TDS

Then, with respect to Brexit,  after winning a no-confidence vote in her own party, Theresa May did not win any concessions at the EU leaders’ summit that she can take home to appease her cabinet and parliament ahead of 'the meaningful vote'. Instead, her Brexit deal is facing strong opposition by both the public, some members of her cabinet and UK parliament. In her address yesterday in the House of Commons, Prime Minister Theresa May said the parliamentary debate on Brexit deal will start in the first week of January with the meaningful vote starting January 14th.

  • UK PM May's spokesman: Citizens should prepare for no deal Brexit

Meanwhile, the pound is under pressure due to the need to ramp up no-deal preparations. A UK May spokesperson said earlier that the Cabinet agreed to set in motion the remaining elements of the no deal preparations.

Key statements:

  • "Government will recommend business now enact there no deal plans as a judge necessary; Citizens should also prepare for no deal Brexit;
  • Leaving with a deal remains mostly likely scenario;
  • There are a number of pieces of legislation would need to pass through parliament to be ready for no deal."

Other than that, the sentiment surrounding a second Brexit referendum is mounting which is sterling positive considering the recent polls that suggest people would now vote to remain. Another positive factor, depending on what side of the fence you are on,  that could play out for sterling before we all head into Christmas and the Commons moves into recess until Jan. 7th would be if the leader of the opposition party, Jeremy Corbyn, pushes for a no-confidence vote in the government which could ultimately equate to demands for a second Brexit referendum.

GBP/USD levels

The market remains under pressure while below the 21 D SMA located at 1.2724. In the immediate future, the pair struggles to hold above the 23.6% Fibo and is capped by the late Oct double bottom lows. All three pointers here provide a strong confluence and resistance level which opens risk to a test of S1 located at 1.2578 and perhaps even 1.25 the figure in the upcoming sessions when factoring in the likely end of month flows and volatility in thin holiday markets.  

"Below 1.2477 targets the 78.6% retracement at 1.2109. Above the 20 day ma lies the 1.2840 current December high but while capped by the resistance line at 1.2933 it will remain offered,"

analysts at Commerzbank argued. 

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