It was hardly a surprise that the EU leaders would approve UK's withdrawal agreement on Sunday. This was more a formality than anything else, as underlined by a mutated initial reaction in the pound at the Asian open overnight. Although the GBP/USD has since risen, the $0.50 worth of gains is a drop in the ocean. The biggest test for Prime Minister Theresa May is when Parliament votes on the deal, expected in the second week of December. Its approval is far from guaranteed. As well as Labour, Lib Dems, SNP and DUP, many Tory MPs themselves have said they would vote against the deal. The pound is unlikely to go anywhere until that vote is out of the way, so expect to see more chop and churn within the existing $1.27-$1.32 range. But with the UK-US 2-year bond yield spread continuing to make lower lows and lower highs, we remain bearish on the GBP/USD despite its bounce today.
As a reminder, EU leaders approved two key Brexit documents on Sunday: (1) The EU withdrawal agreement, which sets out the terms of Brexit covering the £39bn divorce bill, citizens' rights and the Northern Ireland "backstop" – needed in case trade talks stall so that the Irish border remains open, and (2) the political declaration, which describes how the relationship between the UK and EU would be after Brexit.
Mrs May has about two weeks now to persuade MPs to back the deal. There are a number of possible outcomes if the UK Parliament rejected the deal. These include an extension of the negotiations, another referendum, leaving with no deal, or potentially a general election. Any of these scenarios, if realised, would bring with it more political uncertainty, further pressurising the pound. But the EU’s Jean-Claude Juncker has warned that UK MPs need to bear in mind that "this is the best... [and] only deal possible,” indicating that it is not up for negotiations should the UK parliament reject it.
As mentioned, the pound could remain within the existing $1.27-$1.32 range for a while yet, so when it comes to trading it, being nimble – taking it from one level to the next – is still probably the way to go. The key short-term levels to watch now are the high and low from last week’s range at around 1.2930 and 1.2810 respectively. It is likely that there will be a cluster of stop orders resting above 1.2930 and below 1.2765, which may attract price towards it. Specifically, what we are looking for is for one of these levels to be tested in early this week and see if there is acceptance there. If price struggles to go in the direction of the break, however, we would expect it to then make its way towards the other level and probe liquidity there. So, if 1.2930 breaks briefly but then price reverses, then we would expect it go all the way down to 1.2765 as traders play the ranges.
Source: TradingView and FOREX.com.