GBP/USD flexes its muscles on the potential Flextension

Apr 05,2019 19:50   Source:Forex Crunch
  • GBP/USD is trading above 1.3100, on optimism related to Brexit. 
  • The US jobs report is set to push Brexit aside for a while.
  • The technical picture is improving for the pair.

Pound/dollar sticks to the same old range, but it is moving higher. Brexit remains left, right, and center, exactly one week ahead of the new deadline of April 12th. Early in the week, the second round of indicative votes failed and weighed on the pound, raising fears of a hard Brexit. As we near the end of the week, the picture is more optimistic.

1) Flextension?

Donald Tusk, the President of the European Council, is set to offer the UK a “flexible” Brexit extension of one year. Under the reported proposal, Article 50 will be extended by one year, but if the UK Parliament ratifies the Withdrawal Agreement earlier, the UK could exit earlier.

The idea is to appease hard-Brexiteers and prove that the EU does not seek to trap the UK inside the EU. He will have to convince the 27 leaders that prolonging the saga, including the UK’s participation in the EU’s Parliamentary Elections, is the right thing to do.

While markets dislike uncertainty, they hate Brexit, and a long extension, flexible or not, is good news for the pound.

2) Bill to prevent hard Brexit

It was close, but the House of Commons was able to pass a Bill to avoid a hard Brexit in three readings. The binding law is now debated in the House of Lords, where hard-Brexiteers are trying to filibuster it. Nevertheless, the Lords can only delay the ratification but cannot stop the Bill.

Also, pro-Remain peers command a majority in the upper chamber. The government acknowledged that the chances of a hard-Brexit in a week are low.

3) Confirmatory vote offer from the government

The new strategy from UK PM Theresa May was an outreach to the opposition Labour Party. Talks between both major parties have been going on for long hours without a breakthrough reported from either side.

However, the British media is reporting that May will make a written offer to Labour leader Corbyn. According to one source, May will heed to Labour’s demand and include a proposal for a confirmatory referendum on any Brexit deal.

Chancellor of the Exchequer Phillip Hammond publicly called for a second referendum. On the other hand, most Conservatives reject it and “mass resignations” from the government are on the cards. Opposition to a second vote is also heard in the Labour Party.

All in all, the chances for a hard Brexit are lower and for a lengthy extension due to a second vote or EU flexibility are much higher, and this keeps GBP/USD bid.

Non-Farm Payrolls coming

While Brexit headlines tend to be the biggest GBP/USD movers, the focus will shift, at least for some time, to the US Non-Farm Payrollsreport. An increase of around 170K jobs is on the cards for March after a dismal rise of 20K in February. Wages are projected to remain at a satisfactory pace of 3.4% YoY.

More:

Elsewhere, trade talks between the US and China are making progress according to both Presidents of the world’s largest economies. However, there is no date for a summit between the two.

GBP/USD Technical Analysis

GBP/USD technical analysis April 8 2019

The rise of GBP/USD stalled at 1.3120, just at the 50 Simple Moving Average on the four-hour chart. It also trades below the 200 SMA. On the other hand, Momentum turned positive, and the Relative Strength Index is stable.

Resistance awaits at 1.3150 that capped cable early in the week. It is followed by 1.3195 which was the peak so far this week. 1.3270 was a high point last week, and 1.3330 is next.

1.3060 was the recent trough, and 1.3015 was a support line earlier this week. Last Friday’s low of 1.2980 is the next level to watch, and 1.2960 follows closely.

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