GBP/USD: Outlook blurred by Brexit limbo

The chronic uncertainty surrounding Brexit negotiations has offered nothing but pain and punishment for the British Pound. The extent of the unknowns around the path of Brexit makes it very difficult to provide any direction, or market expectations on future Pound movements until the pending vote for the Brexit deal scheduled week commencing 14 January is out of the way. 

Most views on the British Pound are understandably negative, but it does appear that a high level of bad news has already been priced into the Pound. This means that the market will require guidance that the United Kingdom is falling into an unfortunate disorderly Brexit trap to send the Pound to the low 1.20’s. 

Growing concerns revolving around a nightmare no-deal outcome have drained investor confidence thoroughly throughout the past couple of months, while chaos within the Commons has added further fuel to the raging Brexit flames. With the UK political and economic landscape negatively influenced by the Brexit limbo, investors are expected to remain hesitant to hold Sterling.

The mounting pessimism and negativity over parliament approving any deal Theresa May brought forwardbasically means that fireworks are expected for the Pound in anticipation of the previously postponed crucial vote from MPs on the Brexit deal early January. The Irish border backstop clause very much remains as a spanner in the works preventing further progress in Brexit talks, and with this clearly treated as a very sensitive issue for UK MPs what impact this could have on the pending vote in Parliament scheduled for week commencing14January remains open to interpretation.

Adisorderly no-deal outcome remains unlikely, but this scenario must not be overlooked as it could have catastrophic consequences on both the UK and EU economy. If it becomes apparent that the UK is on a collision course to crashing out of the European Union with no deal in place, Sterling will most likely suffer severe losses.

Regardless of the macroeconomic conditions in the UK, the Pound’s trajectory will be heavily dictated by Brexit developments this quarter. With the Bank of England expected to remain status quo on interest rates amid the endless uncertainty, the fundamental outlook for Sterling swings in favour of bears.

The technical outlook for the GBPUSD points to further downside on the monthly timeframe with prices trading within a bearish channel. Price action suggests that the 1.3000 resistance level will continue to act as a psychological barrier preventing upside gains. Sustained weakness below the 1.2700 level is seen opening a path back towards 1.2480 and1.2400, respectively. With the Pound extremely sensitive to Brexit developments, Sterling still has the ability to rebound on any market-friendly outcomes.

*Charts updated on Friday 4 January*