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Sterling's Article 50 reprive playing out at the open: GBP/USD gaps 18 pips higher

  • Following Friday's bid where the pound rallied from 1.2710 to 1.2866, the pound has popped higher at the open in thin trade and is en route to test last week's closing session's highs again.
  • The catalysts behind the moves in the pound are of course Brexit related as we finally get to see Theresa May's Brexit deal put to members of Parliament (MPs) to vote upon, and as things stand, it looks doomed to fail. However, for that reason, the pound is finding some reprieve.

Sterling rallied on Friday on a mix of algos and headlines that the British government was more likely to delay a key Brexit vote for concerns that it would fail; more on that here.

The pair was faded at those highs but the price remains in bullish territory in taking out the 50% retracement Fibo of the late Sep decline from 1.3298 and the 1.2840/50 area is where a line in the sand can be drawn. However, noting the Brexit volatility that has already occurred and simply given cables nature, markets are likely bracing for some wild price action to come over these coming days. 

The case for the downside is, however, compelling. In the background, data recently showed Britain’s economy slowing during the three months leading to November. The official data from the Office of National statistics showed that expansion was at its slowest pace in six months with factories suffering from difficult trade conditions related to Brexit. It is highly likely that the UK will find its self in political turmoil after MPs vote against PM May's deal - (About 100 Conservative MPs, and the Democratic Unionist Party's 10 MPs, are currently expected to join Labour and the other opposition parties in voting against the deal). Opposition Labour leader Jeremy Corbyn gave his clearest indication yet that his party is ready to call a no-confidence ballot within days of Theresa May losing a U.K. parliamentary vote on her Brexit deal, and that is where cable is going to get really interesting. 

In the meanwhile, markets will be tuning into a speech on Monday where PM May will warn that Parliament is more likely to block Brexit than let the UK leave with no deal, which could be ultimately positive for the pound in the meantime, although if Mrs May puts an emphasis on the concerning outlook for UK politics,  adding that trust in politics will suffer "catastrophic harm" if the referendum result is not implemented, then that can only be bearish for sterling's outlook in general. 

The near term Brexit schedule:

Here is what is likely to happen this month, (BBC reports):

  • Monday - Day four of MPs' Brexit debate.
  • Tuesday - Day five of debate followed by "meaningful vote" on the PM's deal. MPs will also get to vote on amendments that could reshape the deal. If the deal is rejected Theresa May will get three working days to come up with a "plan B".
  • Wednesday - Mrs May is likely to head to Brussels to try to get further concessions from the EU.
  • Monday 21 January - Expected Commons vote on "Plan B".
  • The UK will leave the EU on Friday 29 March unless MPs vote to delay or cancel Brexit.

GBP/USD levels

  • Support levels: 1.2805 1.2760 1.2720  
  • Resistance levels: 1.2865 1.2900 1.2945

Valeria Bednarik, the Chief Analyst at FXStreet, explained that from a technical point of view, the daily chart offers a bullish stance:

"The pair has held throughout the week above a bullish 20 DMA, now gaining upward traction, as technical indicators maintain their upward slopes in positive levels, although with limited strength. In the 4 hours chart, the upside is also favoured, as despite losing upward momentum, technical indicators hold near their daily highs, while the pair develops above its 20 SMA and the 200 EMA. If the pair loses the 1.2800 level, however, the risk will turn to the downside, at least short-term."

 

Key notes for the week ahead: Brexit is the key focus and data events become the name of the game

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