Bulls banking on Brexit breakthrough.
This article is originally referred from FXTM Market Forecast Q1 2018.
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The story around Sterling’s aggressively volatile price action during the final trading quarter of 2017 revolved around political risk, stalled Brexit negotiations and growing uncertainty over the outlook of the UK economy.
Although the British Pound surprisingly appreciated near the end of Q4, there is a strong suspicion that this had nothing to do with a change of sentiment towards the British Pound but rather- broad-based Dollar weakness.
With Brexit uncertainty still a recurrent market theme and the Budget Responsibility (OBR) revising down growth forecasts for the next five years, the Pound is still at threat of depreciating.
While a vulnerable Dollar remains a key culprit behind the GBPUSD’s impressive appreciation, another factor could be some cautious optimism over Brexit negotiations reaching another breakthrough in 2018.
As we head into the new trading year, market speculation over Brexit talks and Bank of England rate hike expectations, are likely to continue dominating the outlook for the British Pound.
UK Brexit Negotiation
Although some fears over the progress of the Brexit negotiations eased in December when the European Central Council voted to allow EU negotiators to discuss trade and transition, the official talks may not begin until March 2018.
With the first phase of the negotiations taking up to nine months to conclude, concerns are lingering that the second phase could follow a similar pattern or take much longer than anticipated.
UK CPI and Inflation
Attention should also be directed towards UK macro fundamentals with inflation in sharp focus.
It must be kept in mind that consumer prices in the United Kingdom have jumped to their highest levels in almost six years at 3.1% and this continues to pressure household spending.
Concerns that inflation may out strip wage growth, will raise questions about the sustainability of the UK’s consumer fueled economic growth.
Although the above-target inflation level has stimulated expectations of the Bank of England raising UK interest rates further in 2018, the unsavory combination of Brexit risk and timid economic growth, should be enough to keep the Bank of England on standby in Q1.
It still remains somewhat of a mystery where Sterling will conclude this year, in view of ongoing Brexit uncertainty.
With Pound bulls banking on a Brexit breakthrough and Dollar weakness fueling the upside, Sterling/Dollar could remain somewhat supported this quarter if prices are able to stay above 1.3600.
Technical Analysis on GBP
With regards to the technical, the GBPUSD currently resides in a bullish channel on the daily time-frame with 1.3600 in sight.
While ongoing Dollar weakness could continue supporting the currency pair, the question remains for how long?
A technical break and close above 1.3600 may trigger a further incline higher towards 1.3700.
With the current upside displaying signs of exhaustion on the weekly charts and prices still under pressure on the monthly charts, bears could still make an appearance.
The failure of prices to clear above 1.3700 could trigger a decline back towards 1.3300 and 1.3050 this quarter. Alternatively, a situation where the upside momentum holds, may pave a path to 1.3850.
Original Source: FXTM Market Forecast Q1 2018