GBP/USD Weekly Forecast: Fed outlook may save Sterling as Brexit Status Quo sings: “Down, down, deeper down

• The GBP/USD fell to a fresh 2018 low of 1.2477 as Conservative party leadership challenge increased the chances of no-deal Brexit.
• The currency market disregarded the macro news of UK wages rising above expectations.
• The UK Prime Minister Theresa May won the Conservative party backing with a narrow 200-117 vote but faced the reluctance of European leaders to renegotiate the Brexit deal at the summit.
• It is the monetary policy outlook from Federal Reserve that may help Sterling to leap higher instead of the wide range of UK macro indicators due the week before Christmas. 
• The FXStreet Forecast Poll turned prevailingly bullish only with spot rate dropping to new lows while sideways trend forecast rose due to increased uncertainty.

The GBP/USD fell about 1.2% over the course of the second week of December after opening at 1.2700 level and closing at around 150 pips lower on Friday afternoon, December 14. The news of UK Prime Minister delaying the parliamentary Brexit deal vote and the Conservative party parliamentary members calling the party leadership challenge saw Sterling fall to a fresh 2018 low of 1.2477 and the lowest level since April 11 last year as the prospects for disorderly Brexit became a new reality.

The UK Prime Minister Theresa May won the Conservative party in a narrow 200-117 vote coming out of the vote stronger with safe party position for at least a year. The combination of the Brexit vote delay and the Brexit deal status quo in the UK parliament, the safe side of the bet was to pull the Brexit deal vote out and move it indefinitely, adding pressure on UK lawmakers to act in favor of the deal.

The UK Prime Minister’s strategy proven smart only in the short run as the unexpected call for Conservative party leadership almost stabbed her from the back. Winning her own party backing, although with a narrow lead made her look stronger, nevertheless did little to help her position on the main battlefield in Brussels. While May intended to win the Irish backstop assurances from the meeting of European leader on Thursday, the actual outcome remained muted with May declaring to bring the Brexit deal to a parliamentary vote before January 21 and rather a vague declaration of common interest on the issue with the EU.

Meanwhile, the news from the UK Ofice for National Statistics of wages rising above expectations had no effect on the FX market amid Brexit chaotic headlines.

The UK labor market remained strong in November with the number of unemployment benefits seekers reaching 21.9K and the unemployment rate remained stagnant at 4.1%, after ticking up from September’s 4-decade low of 4.0%.

Moreover, the pay increases in the UK accelerated with both regular and total pay rising 3.3% y/y in three months to October. That is up from 3.2% for regular pay, excluding bonuses, in the previous months and up from a revised 3.1% for total pay that included bonuses in the previous month.

The UK regular pay January 2006-October 2018

Source: Office for National Statistics

The week ahead is expected to feature a wide range of the macroeconomic releases including the Bank of England monetary policy decision. The UK retail sales report, November inflation data and final reading for the UK third-quarter GDP are all unlikely to affect Sterling amid ongoing Brexit uncertainty and the US Dollar strength stemming from the outlook for monetary and trade policy.

It is, in fact, the combination of the Fed indicating a pause in its rate-hiking cycle in combination with the technical outlook that may help Sterling to leap off yearly lows. Technically the GBP/USD need to break back above 1.2660 level representing the previous strong support and a 23.6% Fibonacci retracement of a post-Brexit jump to 1.4773 high to confirm further bullishness. The Slow Stochastics and Momentum indicators also favor the upside directional move although the fundamental picture is much more decisive for the direction of Sterling.

With UK business all singing “All I want for Christmas is EU” the FX market sing Status Quo’s “Down, down, deeper down” for Sterling

Technical Analysis

GBP/USD daily chart

The GBP/USD broke below important support zone represented by 23.6% Fibonacci retracement of post-Brexit rise to 1.4773 and now it is heading lower. Sterling fell to a fresh  2018 low of 1.2477 but retreated after the UK Prime Minister Theresa May won in a no-confidence vote of her own Conservative party. The GBP/USD is trading in mid 1.2500s and remains fragile to further decreases in the Brexit chaos caused by the political development. The target for GBP/USD stands at 1.2150 on the downside and it is likely to be met should the upcoming Breexit-related events result in further loss of confidence that the UK may exit the European Union with no-deal.

Upcoming macroeconomic events

The economic calendar in the week ahead is headlined by widely expected rate hike from the US Federal Reserve that should bring the overnight target range to 2.25%–2.50%. While the US rate hike is a sure shot for the financial markets, the key outcome of the post-rate decision press conference is the economic and the monetary policy outlook the Fed Chairman Jerome Powell is going to pursue. Should the Fed chair indicate a pause in the rate hiking cycle now, the selloff in the US Dollar would be beneficial not only for Sterling but for most of the world currencies.

Apart from that, some growth indicating data are due on Friday, but the final reading for the third-quarter US GDP and the Durable goods orders are not expected to be game-changing indicators for the course of the US Dollar.

US economic indicators December 17-21

The UK economic agenda includes the UK inflation data that are expected to see the headline inflation decelerating to 2.3% y/y while core inflation is seen at 1.9% y/y in November. The UK retail sales are set to rise 0.2% m/m ahead of the Bank of England expectedly staying pat on the Bank rate amid ongoing Brexit uncertainty. With the Bank of England December monetary policy decision issuing Monetary policy statement only with no press conference of Governor Mark Carney, not much currency market support for Sterling is expected to arise from the event.

The third-quarter GDP reading due on Friday ahead of Christmas is unlikely to alter the second estimate of 1.5% y/y increase. 

UK economic calendar December 17-21

FXStreet Forecast Poll

The FXStreet Forecast Poll estimates GBP/USD to reach 1.2512 down from last week's 1.2743. As the UK parliamentary vote on Brexit deal was postponed and the UK Prime Minister faces headwinds from the Brexit deal vote, the FXStreet Forecast Poll turned increasingly bearish with bearish-to-bullish forecast ratio at 47-18 and 35% of sideways forecasts, down from a more balanced estimate of 43%-50% last week. 

Forecasts for 1-month ahead remains bullish, but the forecast is down 160 pips from last week's 1.2869 and down from 1.2843  expected two weeks ago. The share of the bearish forecasts narrowed to 27%-47% with sideways forecast increasing to 26% as the forecast uncertainty rose. 

The FXStreet Forecast Poll remained also prevailingly bullish for 3-month time expecting 1.2843, down from 1.2966 foreseen last week and 1.2961 two weeks ago. The share of bearish forecast also dropped to 23%-60% with sideways forecast reaching 17%. This is down from 41%-51 bearish-to-bullish ratio last week.  

FXStreet Forecast Poll

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