Sterling Volatility Could Jump Higher Ahead of EU Summit
It is an important week for the United Kingdom as a potential deal could be announced as soon as today, that will facilitate an orderly exit from the EU.
Negotiations between the EU and UK will end ahead of the EU summit that takes place on Thursday and Friday. For that reason, if a deal is to be made, it should be announced relatively soon.
On the other hand, if the two parties are not able to reach a deal, the most likely scenario is that the UK will ask for an extension. This would accompany an election and all sorts of uncertainty.
For this reason, the Sterling exchange rate is likely to be very volatile over the next two sessions. Traders will be closely watching their news feeds for any incoming data and repricing the exchange rate accordingly.
The markets started pricing in a premium for a no-deal exit even before Boris Johnson was elected as Prime Minister. At this point, it looks like there is a bit of an unwinding of this position following news last week that the UK is moving closer towards a deal.
In this context, I expect the British pound will be well bid in the absence of news. To be clear, there have been negative headlines since the start of the week, but I am speculating it will take something concrete that suggests a deal won’t be reached to trigger a reversal in the Sterling rally.
From a technical perspective, the pair broke to a 3-month high on Friday and carries a bullish near-term bias. Last week, the pair was held lower by the 1.2700 level. I see some further resistance at 1.2738.
The pair certainly looks strong and any indication that Brexit talks are going smoothly might just offer the markets a reason to bid it up further. I see some potential for the pair to extend gains towards resistance at 1.2924.
In yesterday’s forecast, I was looking at a horizontal level at 1.2575 to the downside. The level had already been breached but buyers lifted the pair back above in the New York session and the pair regained strength. I’m still looking at this same level for downside support.
- GBP/USD is well bid as investors view the odds of a no-deal scenario lessening.
- Sterling is likely to see a jump in volatility as there are just two days left for negotiating a deal.
- A break above 1.2738 could see the pair rally all the way to 1.2924.
This article was originally posted on FX Empire
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