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  • GBP/USD is back under pressure while markets consider the negative ramifications of the UK crashing out of the EU in a no-deal scenario.  
  • GBP/USD is succumbing to upside pressures in the greenback as investors struggle to find a better alternative considering the mounting geopolitical risks as we head into the final weeks of 2018.
  • GBP/USD is currently trading at 1.2750, down from a high of 1.2820 on the Asia/European handover. A low of 1.2730 was made in NY so far.

We are entering the final stage  of 2018, and it feels like it is all coming to a head. No matter where you look, 2018 has been a feast for the bears and a disaster for a long and hold plays. If traders had not already mastered a risk management strategy, those that are still in the game have certainly done so by now. Cable is renowned for roller coaster price action, and it feels like the operator is on the verge of putting the peddle to the meddle as PM May now travels the nation seeking to drum up support for her Brexit plan that has been signed off by the EU ahead of the parliamentary vote on December 11 which is where the real risk for the pound has been lurking.

Key risks ahead

However, while it is tempting to stay focused solely on Brexit, other risks can’t be ignored concerning the greenback. DXY is now trading way above the 61.8% Fibo of the mid-Nov decline to recent lows at 96.04 – The 61.8% Fibo level is 97.06 and a line in the sand. In today’s price action, the DXY has pierced the 78.6% Fibo by a few pips to 97.37. Investors are scrambling back to the greenback, struggling to find an alternative as geopolitical risks mount up once again ahead of the Xi/Trump summit at the end of this week. The Hawks in Washington are swooping down over China’s head with their talons on display, and Trump remains stalwart as ever towards Beijing in preparation for a tabletop face to face with Xi.  

China is just half of the story

However, China is just half of the story. Trump has also stirred up a whirlwind of risk when it comes global imports of autos as well as Brexit. Firstly, he made a comment that pressured Sterling saying, “Right now if you look at the deal, [the UK]may not be able to trade with us. And that wouldn’t be a good thing. I don’t think they meant that.”

Then, with respect to auto imports, the Commerce Department has recommended 25% tariffs on all imported autos except those from Canada and Mexico. Trump may pull the trigger as soon as the start of December which is going to hurt Japan and the EZ. However, that seems like a double-edged sword. In America, Toyota has ten plants, 136,000 employees and 1,500 dealers that contribute to their local economies. Tariffs on auto imports could, therefore, hurt American jobs & raise consumer costs,” the Japanese manufacturer said previously. Then concerning the Europeans, automakers there, “not only export vehicles into the US, but many of them also have a major manufacturing footprint there, thereby creating hundreds of thousands of direct and indirect jobs,” the European Automobile Manufacturers’ Association (ACEA) said.

All eyes on Federal Reserve’s Powell

The final risk slated for the near future comes with Federal Reserve’s Powell speaking on the economy as soon as tomorrow where he is slated to speak at the Economic Club of New York. Markets will be listening intently to hear if he bows to the recently less hawkish sentiment surrounding the Fed’s path of tightening following such critics as including President Donald Trump, who has been calling for the Fed to slow its pace of rate hikes, as being concerned about how they may jeopardise the rate at which the US and world economy can continue to grow.  In the face of weakening stock markets, it really is all eyes on Powell at this point, at least until Xi/Trump and PM May take back the baton.

“Given the threat of a hard Brexit, GBP is vulnerable on the downside,” analysts at Rabobank argued:

“We see scope for a move towards EUR/GBP1.00 on a hard Brexit.  If the withdrawal agreement is passed by parliament we would expect a knee-jerk positive reaction in GBP and for EUR/GBP to then settle around 0.86 as the terms on the EU/UK’s future arrangement are negotiated.”

GBP/USD levels

The price is now well and truly submerged below some key moving averages on the 4hr time frames. RSI is now bearish across multiple time frames. Cable has now broken 1.2763 which opens 1.2708/1.2662, the August low and 3-month support line. Bears can target, on the wide, the 61.8% Fibonacci retracement of the 2016-2018 advance and the June 2017 low at 1.2593/89. On the flipside, 1.28 the figure will likely be protected while rallies will most probably struggle much beyond 1.2850 to 1.2880 at this juncture, at least until the fundamental landscape switched over in favour of the upside.