GBP/USD went up and down on the flow of news related to Brexit as the critical vote in Parliament nears. Apart from the all-important event, there are several economic indicators of interest. Here are the key events and an updated technical analysis for GBP/USD.
The General Advocate of the European Court of Justice opined that the UK could unilaterally revoke Article 50, thus reversing Brexit. However, the government insists that it will proceed with exiting the EU. The debate in Parliament began with defeats for PM May’s government. Most importantly, Parliament gave itself powers to decide on the next step if the vote fails. The vote has greater chances to fail after the legal advice on the Irish backstop stated that the UK will “endure” in the customs union, a wording that angered Brexiteers. Calls to postpone the vote were rejected by Downing Street. In the US, the NFP slightly missed expectations but Powell remains optimistic about the economy. The summit between Trump and Xi seemed successful at first but the different statements and the arrest of Huawei’s CFO muddied the waters.
GBP/USD daily graph with resistance and support lines on it. Click to enlarge:
- Jon Cunliffe talks: Monday, 6:30. The Deputy Governor of the Bank of England will speak in a conference in Istanbul, Turkey, and may provide insights into the global economy and the economic situation. He will likely dodge the sensitive topic of Brexit.
- ECJ ruling on Article 50: Monday, around 8:00. The European Court of Justice will issue its official ruling on the revocability of Article 50: the exit clause out of the European Union. After the General Advocate opined that the UK can do it unilaterally, the court is expected to approve this opinion. Such a ruling will encourage pro-Remain voters and MP’s in the UK to try and stop Brexit, probably via a “People’s Vote” or second referendum. The government is unlikely to change its position.
- UK GDP: Monday, 9:30. The UK switched to publishing monthly estimates for its GDP growth earlier in the year. The publication for September was somewhat disappointing with 0% growth. Nevertheless, Q3 saw an upbeat expansion. We will now receive the first insight into Q4 with the publication for October. The outcome will feed into the Brexit debate. GDP is expected to rise by 0.1%.
- Manufacturing Production: Monday, 9:30. Alongside the GDP report, the UK publishes the components of growth, with manufacturing standing out. The sector was projected to benefit from the weaker exchange rate but did so only partially. After an increase of 0.2% in September, the output is expected to be flat in October. The broader industrial output is expected to drop by 0.4% after remaining flat beforehand.
- Goods Trade Balance: Monday, 9:30. Britain has a chronic trade deficit. However, it squeezed just below 10 billion pounds in September, standing at 9.7 billion. A fresh widening to 10.5 billion is projected for October.
- Jobs report: Tuesday, 9:30. As members of Parliament will get ready for the vote, they will have another top-tier indicator to ponder into and so will Sterling traders. Wages remain of high importance to the pound and also to the BOE. Average Earnings accelerated to 3% y/y in September, an encouraging development. The same rate is on the cards for October. The unemployment rate disappointed with a small increase to 4.1% that month and no change is expected. Another shortfall was seen in the Claimant Count Change, or jobless claims, for October which rose by 20.2K, above projections. We will now get fresh figures for November which are expected to show an increase of 13.2K.
- Parliament votes on Brexit: Tuesday, the exact timing of the vote is unknown at this point. UK PM Theresa May reached an agreement on the withdrawal of the country from the European Union. And now, Parliament will have its “meaningful vote” on the accord. The deal ends free movement of people and secures the rights of citizens but the agreement on the “Irish backstop” is criticized by many. It ensures an open border in the Emerald Isle but ties the UK to EU regulations. Under the accord, the UK leaves the EU on March 29th, 2019, but remains in an implementation phase until at least the end of 2020. The government lost the support of the Northern Irish DUP on which it relies and many pro-Brexit members of May’s Conservative Party stated they will vote against the accord. Several opposition Labour members may support her. At the moment, it seems that the government will fail to pass the deal. In this case, the Pound may suffer quite a bit, alongside stock markets. The expectation is that the UK will then return to Brussels, achieve a few minor concessions and return for a second vote. The tweaks and the rout in financial markets would then convince members to vote for the deal. Other scenarios include the passage of the deal in the first vote, a pound-positive development that is not priced in. A third scenario is a significant defeat for the government that would clarify there is no chance for a second vote. In this case, there are growing chances of a no-deal Brexit, which would be devastating for the pound, general elections in which Labour’s Jeremy Corbyn could become PM, a second referendum, or a reversal of Brexit. In this scenario, only uncertainty and high GBP volatility are guaranteed.
- RICS House Price Balance: Thursday, 00:01. The Royal Institution of Chartered Surveyors showed a deteriorating situation in the housing market in the past two months, with the balance between surveyors reporting price decreases overtaking those that report an increase. After a level of -10% in October, a level of -9% is expected for November.
- CB Leading Index: Friday, 14:30. The Conference Board’s composite index uses seven different indicators. Back in September, they showed a decline of 0.4%. Another slide cannot be ruled out for October.
* All times are GMT
GBP/USD Technical analysis
Pound/dollar suffered yet another choppy week and dropped to 1.2660 (mentioned last week), thus setting a double-bottom, before it recovered.
Technical lines from top to bottom:
1.3375 was a high point in July. It is followed by 1.3300 was the high point in September and also a psychologically important round number.
1.3255 was the high point in mid-October, ahead of the EU Summit on Brexit. 1.3170 was a swing high in early November.
1.3070 was a high point in mid-November. The round number of 1.3000 is important after providing support to the pair in late September. 1.2910 was a high point in late November. 1.2850 capped recovery attempts in late November.
Further down, 1.2790 served as support late August and also beforehand. 1.2765 was a swing low in mid-November. IT is followed by the trough of 1.2725 seen earlier that month.
The current 2018 trough at 1.2660 is the next level. 1.2590 was a swing low in September 2017.
Even lower, 1.25 is a round number and also worked as support in early 2017. Further down, 1.2420 and 1.2330 are notable.
I am bearish on GBP/USD
While it is hard to foresee how UK politics develop in the upcoming week, there is a greater chance that chaos will endure, at least temporarily. The multiple options of fresh elections, another referendum, a resignation of May, and other unforeseen options could bring down the pound even if they could eventually lead to a more favorable result. One thing is certain: high volatility is here to stay.
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