Back To School & Brexit

As financial markets start to grind back into action after the quieter summer period, one of the main stories dominating news wires is that of UK politicians voting on the EU Repeal Bill. UK PM Theresa May cautioned last week that the UK could be facing a Brexit “cliff edge” if parliament failed to support her EU Repeal Bill which will be debated on Thursday.

May’s task of pushing through the repeal bill is not an easy one as she has only a slim majority in parliament as part of the conservative-DUP pact following the snap election in June. If Parliament rejects the repeal bill, there is likely to be some volatility as markets adjust their position on Brexit while if the bill is passed, as expected, there is unlikely to be much GBP topside

The political environment, specifically regarding Brexit, has been a key determinant of price action over the year. However, following, commencement of Brexit negotiations it’s likely that negative headline slinked to Brexit have been factored into the price action. As such, the more important driver of price action over the coming month is likely to be the BOE and the ECB.

Fighting Forces Stifling GBP

Following a decline over August, GBP has started to recover against the US Dollar as markets have begun pricing out a December US rate hike, leading to broad USD weakness. Furthermore, the recent US employment reports, which showed weakness in both the headline NFP and wage-growth put further pressure on the currency which has been trading lower in response to five consecutive CPI misses.

While the subdued USD environment and outlook is likely to be a supporting factor for GBP, data weakness and political uncertainty should provide a cap on any upside. Data released last week showed that UK construction fell to a one-year low in August as Brexit uncertainty has caused a drop in investment in the commercial sector.

The technical landscape in GBP/USD points to the risk of a downside break with a potential head and shoulders formation developing within the broader rising wedge pattern which has framed action this year. A break of the summer low at 1.2764 should pave the way for a deeper move toward the 1.2580 low which is likely to act as support on the first test.