GBP/USD Forecast: Three scenarios for the Brexit showdown after sterling hits near three-year lows

• The government and the opposition battle for Brexit in a dramatic showdown.
• The most likely scenario is a victory for the opposition and elections on October 14.
• GBP/USD has already cracked 1.2000 ahead of a critical day in parliament.
• Oversold conditions on the four-hour chart may provide some relief.

It is hard to exaggerate the importance of today's parliamentary session – a "do or die" moment for the attempts to block a no-deal Brexit – that may lead to elections. GBP/USD has already broken below 1.2000 and hit the lowest since October 2016 – 1.1971 is the trough at the time of writing. 

On Monday, both the opposition and the government showed their cards.

The "rebel alliance" of Labour, the Liberal Democrats, other opposition parties – and crucially pro-Remain Conservatives – laid out their legislative plan. The first step is to pass an emergency motion that will allow the alliance to take control of the House of Commons's agenda.

The next step is a bill that will force the government to receive parliament's approval for any type of Brexit – either a new agreement with the EU or leaving without an accord. If the government fails to reach a new deal with the EU or parliament fails to pass it, the bill forces the government to ask for a three-month extension from October 31 to January 31. 

Prime minister Boris Johnson moved to block such a scenario. In a statement – partially disturbed by protesters' shouts – he vowed not to ask for an extension "under any circumstance" and added that nobody wants an election. However, 10 Downing Street briefed journalists that Johnson will opt for elections if the opposition gets its way. The date is October 14 – initially planned for a new Queen's Speech. 

Johnson previously threatened to deselect – or expel – Tory MPs that vote with the opposition – but enough of them seem unperturbed – raising the chances of success for success in passing the bill. They have cried foul at the hypocrisy – Johnson, and many of his colleagues voted against former PM Theresa May's accord.  

Labour leader Jeremy Corbyn has repeatedly said that he is ready for elections. Support from the opposition is critical for calling elections – as a two-thirds majority is needed.

The current law stipulates that the PM may then change the date of the poll. Some suspect that after passing the election bill, he will do just that and set the elections for November – after the Brexit deadline. Trust is running low in Westminster. 

Three scenarios for the epic Brexit battle

1) Opposition wins, then goes for elections

With enough rebel Conservatives voting with the opposition – and not enough Labour rebels to support the government – the block no-deal Brexit deal may pass. The government will then call for elections. Given Corbyn's willingness to go to the country, a two-thirds majority may be achieved. 

In this scenario, which has a high probability, GBP/USD may drop on the high uncertainty but will wait for further developments and may refrain from an outright free-fall. 

2) Opposition loses

If not enough Tories vote against their party – due to fears for their political career – the bill will fail. That would open the door to a no-deal Brexit that the government threatened. 

In this case, GBP/USD may plunge to all-time lows.

3) Opposition wins, no new elections

In this scenario, the opposition sees Johnson's elections ploy as a trap and does not go along. The government will then be forced to opt for an extension.

Assuming the government respects the law – something which has been cast in doubt – GBP/USD may surge as the UK will not "fall off a cliff." 

Other scenarios – which may wait for Wednesday – include a vote of no confidence in an attempt to oust Johnson. 

All in all, the political situation is liquid, and high volatility is likely in GBP/USD.

GBP/USD Technical Analysis 

The Relative Strength Index (RSI) on the four-hour chart is significantly below 30 – indicating oversold conditions. Nevertheless, the extraordinary political conditions may result in further falls. 

GBP/USD has dipped below 1.1985 – which is 2017's low point. The next support line is the flash-crash low of 1.1866. The round number of 1.1900 may cushion the fall. Below 1.1866, GBP/USD will be at all-time lows.

Resistance awaits at 1.2015 – the previous 2019 low. Further up, 1.2065 was a swing low in mid-August and now works as resistance. It is followed by 1.2110 that provides support later in August.