The pound's gains have come at the start of a busy week
, which includes the Federal Reserve and Bank of England policy meetings on Wednesday and Thursday respectively. But the focus remains firmly fixated on Brexit as far as sterling’s near-term direction is concerned. On that front, there is a key vote in parliament happening later on today, the outcome of which could see the pound move sharply.
Johnson's Bill faces commons vote
The controversial new Internal Market Bill introduced by Prime Minister Boris Johnson has been one of the reasons behind the pound’s recent weakness, as it triggered widespread criticism from politicians from both sides. Having already negotiated and signed the withdrawal agreement with the European Union, the proposed bill is designed to override the Northern Ireland Protocol, designed to prevent a hard border returning to the island of Ireland.
Critics say the bill will break international law, while advocates say it is only an insurance policy in the event of a 'worse case' scenario. The bill will be debated and voted on in the UK's House of Commons later today and it is expected to win the vote, although it will likely face more difficulties when the legislation heads for debate in the Lords.
If the bill is accepted then we may see fresh selling pressure for the pound, while an unexpected rejection should trigger a more significant move in the opposite direction. The reason why I don’t think the pound will necessarily fall sharply if the bill passes is because the move should already be priced in.
Pound weakness may be temporary
While the situation certainly looks bleak and a chaotic split with no trade deal is what is being priced in, that’s not to say the clouds will never clear and the storm won’t pass. Boris Johnson is playing a dangerous game, but the proposed bill could be all part of his negotiation tactics and strategy. In the end, a compromise may be reached, and a cliff edge Brexit will probably be avoided, as it is not in either party’s interests. So, I wouldn’t be surprised that after huffing and puffing, one of the two parties will blink and agree to some comprise in the coming weeks. The pound could strengthen sharply if investors realise they have overreacted to the recent events.
UK virus cases climbing sharply again
Meanwhile a new restriction on gatherings of no more than six people both indoors and outdoors has started in the UK today after new coronavirus cases rose sharply, holding above 3,000 for a third day on Sunday. This is the fastest pace of the virus outbreak since May, and the reproduction rate has jumped above 1.0, which means there is a risk for an exponential rise in infections and possible further government restrictions to bring the ‘r’ down again. The ‘rule of six’ will be a blow to the hospitality sector, having just been kick-started with the recent government subsidies and discounts.
Cable bounces off key support
It is worth pointing out that the cable’s rebound today is partly driven by technical factors. Those who are optimistic about the UK economy post Brexit, may have taken advantage of last week’s dip to bid the GBP/USD as it tested THIS key support area:
Source: TradingView.com and ThinkMarkets
The 110-pip shaded region between 1.2690 to 1.2800 on the chart above is where prior support and resistance meets the 200-day moving average and 38.2% Fibonacci retracement against this year’s high. In the upper end of this region, the cable created a doji candle on Friday. At the start of this week, price tested this key zone again and it bounced. So far, so good. The cable now needs to hold above Friday’s high of 1.2865, else there is a risk we may see another sell-off, especially as rates now approach potential resistance circa 1.2885. Expect some sideways action here, but a large-ish daily green candle here should give the green light for the bulls, while a red candle would be deemed bearish as it would point to another failed recover attempt.