Key Brexit Vote This Week, GBPUSD Price Action Largely Gravitates Around This Political Risk
There's this thing, maybe you've heard of it, called Brexit. Apparently its a bit of a pickle since members of Parliament, the UK government, and EU negotiations can't decide on how it'll go down. This Tuesday though we will find out what direction its headed in.
On Tuesday, UK Prime Minister Theresa May will propose another deal to the lower House of Commons to try and convince her fellow parliamentarians if the second deal she negotiated with the EU's Jean-Claude Junker and Donald Tusk is up to snuff. Unfortunately, we've seen this show before and some suggest that this is not going to pass in Parliament. This is mainly due to the fact that the past week of negotiations between the UK and EU sides was particularly hostile, lacked progress, and hit a snag with an increase of complexities in the arbitration panel that the withdrawal treaty has.
Mainly, the UK side wanted to make sure that the Irish backstop would be indefinite, if that there was no way to find a resolution to the backstop that the UK would not be forced to have a hard border with Ireland, and that some kind of arrangement could be made in the future after the primary Brexit deal was made. Much of this hinged on a Victorian-era common law concept of "reasonableness" which, according to the Financial Times, not even ambassadors could even understand when the EU deputy head of negotiations tried to explain this concept to them. Basically, the EU saw was a fundamental attempt to rewrite the backstop which was not acceptable. Overall, we are not even sure what May's deal will be on Monday, but it may be virtually the same deal she presented to Parliament in late 2018 that failed.
In the event that whatever deal PM May proposes is voted down, then we enter what PM May calls a "crisis", but really Parliament will just extend Article 50's March 29th deadline. We could speculate further into the week what could happen, but to this point we've assumed that Parliament will vote down the Tuesday vote which is not necessarily set in stone. Either way, the Manchester Evening News better laid out what could happen than I could articulate. Overall though, the general consensus is that PM May's deal will lose and Parliament will then kick the can down the road to extend Article 50.
Either way, this week will be profound for the future of Brexit and British politics. The pound has given itself considerable room to fall in the event that something bad happen which will inevitably be the outcome regardless of which choose-your-own-Brexit-story your imagination wants to adopt.
Getting into the weeds of the forex trading on this issue, the GBPUSD is a great way to indicate the pulse of Brexit as it is most representative of the macroeconomic trends which will result from the outcome of this deal. Clearly, there is strong monthly resistance between 1.3254 and 1.3349 while RSI is about as neutral as it can be. Of note, 50 day and 200 day moving averages are about to converge with the daily chart indicating a potential death cross, a bearish signal.
However if Brexit is extended, it'll give a bit more air for the currency to breath. The question then becomes how much time will the UK be given. Long-term then, this currency appears significantly overvalued as the cost of trade will go up regardless of what kind of Brexit deal is made. The only chance that this long-term trend is avoided would be if the UK backs out of Brexit which, while a possibility, is not probable. Keep an eye on this space this week as key Brexit news will be broken over the wire.
The bottom line remains the same as it really had been for the past two years. Brexit is bad for the UK, nobody knows what Brexit will look like, but now we also don't really know when Brexit will actually happen. To be determined.