GBP/USD – Bearish case building?

EU27 to decide on Brexit extension

Today is the day we’ve all been waiting for, the reason why markets have been so subdued at the start of the week. An emergency EU Brexit summit, ECB meeting and Fed minutes will ensure this is anything but a boring day in the markets.

Theresa May will learn the terms of the UK’s article 50 extension today, after the leaders of the other 27 countries meet to discuss her request. There are numerous ideas on the table, from May’s June 30th request to Donald Tusk’s one year “flextension” but it’s possible that neither will get the full backing of the EU27. Unfortunately for May, she doesn’t hold much leverage and is instead relying on the goodwill of the very peers she’s spent the last two years frustrating.

It’s very unlikely though that an offer won’t be forthcoming, it’s just a question of how politically painful it will be for the Prime Minister because with Parliament committing her to an extension and the current deadline two days away, she doesn’t have many options. Of course, Parliament could still back her deal by Friday and leave on 22 May but that doesn’t seem very likely right now.

GBPUSD Daily Chart

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Is an extension bullish or bearish for GBP?

Brexit has gone from the source of volatility for the pound to sucking the life out of it. We’ve been rangebound in cable – like many other sterling pairs – for close to two months now and this constant indecision and delay tactics isn’t helping matters.

One thing that is interesting is that the rallies in GBPUSD are being sold into earlier each time. I don’t think this is a sign that no-deal risks are rising – even if they technically are as we’re two days from the current Brexit day with no deal – rather I think it may be an acceptance that a delay is inevitable.

If a long extension is agreed, what then? Is it bullish or bearish for the pound or just priced in? If it’s is the final of these three options, then what we could be seeing is profit taking on those positions that had built on the expectation of an eventual deal, creating potentially near-term downside pressure for the pound.

GBPUSD 4-Hour Chart

If we take the fundamentals out of this, this certainly looks like a bearish setup and 1.30 looks the more likely to break than 1.33, which would draw attention to 1.28 as most recent support back in mid-February.

Of course, with something as unpredictable as Brexit can be, this could change in a heartbeat and the EU27 may well offer something that tips the balance once again for the pound. It could be a very interesting second half of the week.

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Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.