GBP/USD & EUR/GBP FORECAST: STERLING COULD HOLD TRADING RANGE AMID BREXIT DELAY
- The Sterling looks sandwiched between major levels of confluent support and resistance which may broadly contain GBP price action as forex traders await key upcoming Brexit dates
- GBP/USD and EUR/GBP could ping-pong back and forth between critical technical barriers with the British Pound anchored until Brexit clarity emerges from next month’s general election
- Check out this Brexit Timeline for details on the history of Brexit negotiations with insight on Brexit’s impact on spot GBP and financial markets
GBP price action has been shaken up over the last two months with the Pound Sterling surging overwhelmingly in response to growing hopes that UK Prime Minister Boris Johnson would deliver a long-awaited Brexit Withdrawal Agreement. The PM has faced a gridlocked Parliament and although British MPs approved Boris Johnson’s Brexit deal, they refused to support his fast-tracked timeline to deliver Brexit. Consequently, the Boris Johnson was forced to request another Brexit delay until January 31, which was approved unanimously by the EU27 despite France’s initial reluctance.
BRITISH POUND OUTLOOK MIRED BY BREXIT UNCERTAINTY AS SNAP ELECTION LOOMS
PM Boris Johnson subsequently withdrew his Brexit bill and called for a snap election in pursuit of gaining majority in the House of Commons and deliver Brexit by breaking the longstanding impasse that has roiled the UK economy. As a result, there’s a major ‘Brexit question mark’ outstanding that will likely remain until the upcoming general election results are finalized. Lingering Brexit uncertainty could thus keep the British Pound largely rangebound until clarity emerges on Boris Johnson’s snap election and the new Parliament’s capacity to pass necessary Brexit legislation.
GBP/USD PRICE CHART: DAILY TIME FRAME (DECEMBER 20, 2018 TO NOVEMBER 01, 2019)
With that in mind – and keeping a close eye on UK election polls as traders speculate ahead of the December 12 vote – it could be prudent to take a high-level approach when analyzing where the British Pound might head next. That said, GBP price action has recently compressed into a well-defined trading range underpinned by key technical levels of confluent support and resistance in response to the aforementioned latest Brexit developments. Spot GBP/USD has fluctuated roughly between the 1.28-1.30 handles since mid-October and these technical barriers could keep Sterling prices contained over the near term.
Also, options-implied trading ranges derived from at-the-money options contracts can also be used to highlight major areas of technical support and resistance that can keep underlying spot prices generally contained. Statistically speaking, 1-standard deviation options-implied trading ranges should encompass price action over the specified time frame with a 68% statistical probability. That said, GBP/USD 1-week implied volatility of 7.17% estimates that the cable will fluctuate between 1.2812 and 1.3080 over the next week.
GBP/USD PRICE CHART: WEEKLY TIME FRAME (JUNE 15, 2015 TO NOVEMBER 01, 2019)
Looking further out with a focus on GBP/USD 1-month and 3-month options-implied trading ranges, which approximately aligns with the key upcoming Brexit dates of December 12 and January 31, we find that spot prices have generally ping-ponged between these important levels of technical confluence dating back to mid-2016.
GBP/USD 1-month implied volatility of 7.58% estimates that spot prices will fluctuate between 1.2665-1.3227 while GBP/USD 3-month implied volatility of 10.06% estimates that spot prices will fluctuate between 1.2299-1.3593 with a 68% statistical probability over the respective timeframes.
EUR/GBP PRICE CHART: DAILY TIME FRAME (JANUARY 24, 2019 TO NOVEMBER 01, 2019)
Likewise, spot EUR/GBP has also coiled into a tight trading range over the last 2-weeks. With the expectation that recent choppiness in the British Pound will likely continue until forex traders are provided with more Brexit clarity, EUR/GBP price action could be broadly contained between technical support and resistance indicated by its options-implied trading range. EUR/GBP implied volatility of 5.93% derived from its 1-week options contract suggests that spot prices will remain relatively anchored between 0.8559-0.8701 with a 68% statistical probability next week.
EUR/GBP PRICE CHART: WEEKLY TIME FRAME (OCTOBER 18, 2015 TO NOVEMBER 01, 2019)
Applying the same methodology, EUR/GBP 1-month implied volatility of 6.54% estimates that spot prices will fluctuate between 0.8468-0.8792 while EUR/GBP 3-month implied volatility of 8.94% estimates that spot prices will fluctuate between 0.8247-0.9013 with a 68% statistical probability over the respective timeframes.
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