Where now for GBP ahead of Brexit votes?
A reduced possibility of no deal has lifted the pound back to $1.33, although hurdles remain in the longer term.
The recent surge in GBP/USD has taken the pair back to the September 2018 highs above $1.33. The basis of this move has been renewed market optimism that a ‘no-deal’ scenario is much less likely.
The shift from the UK Prime Minister (PM) Theresa May has seen members of parliament (MPs) given a date for a vote on rejecting a no-deal outcome, as part of a series of votes on her deal and on an extension to Article 50. Of all the possible scenarios, a no deal bothers investors the most, since it would technically suggest that the UK would be cut off from key export markets and find its financial services isolated from Europe, as well as a host of other unpleasant outcomes.
It is still unclear how a no-deal will be avoided, since if MPs reject PM’s withdrawal agreement and vote against an extension of Article 50, no deal would be the only outcome possible, barring some very fancy footwork from the EU and the UK. However, the will appears to be there and, with the clock ticking down to 29 March, minds will hopefully be concentrated on providing a smoother outlook for the UK economy.
GBP/USD has been rallying on the news, further reinforcing the idea that the pair has been bottoming out over the past six months. Repeated moves into the $1.25-$1.27 zone found buyers, and the January rally managed to create, if only just, a higher high, followed up by a higher low in mid-February.
Combined with this, the moving averages have begun to flatten before turning higher, reinforcing the bullish view. While some weakness is now possible, any pullback that stays above $1.28 creates another higher low and a further buying opportunity.
Cable still has a long way to go before it can reclaim the highs of late 2018, and there will be plenty of disruption along the way. But a softer policy outlook from the Federal Reserve has weakened the US dollar, boosting GBP/USD as a result. With the future of the UK economy looking less uncertain, sterling may have a better time ahead of it. Brexit and its associated problems have not gone away, and long trade negotiations lie ahead, but some of the dark clouds over the UK have now dissipated.
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