GBP/USD: What Next for the Volatile Pound Sterling?
The pound sterling is relatively unchanged today as traders react to the latest actions on Brexit. The GBP/USD, which had its worst day in three months yesterday, has risen to 1.3353. The EUR/GBP, has bounced to 0.9070 while the GBP/CHF is trading at 1.1898.
The main reason why the pound sterling is getting volatile is that the December 31st deadline is fast closing. The two sides are not close to a deal. In a brief to the European Union, Michel Barnier warned that he could not guarantee that a deal will happen. In another report, British newspapers reported that Boris Johnson was considering abandoning the talks.
All eyes will now focus on Johnson, who will travel to Brussels to hold talks with Ursula von der Leyen and other leaders. Still, there are no indications that the two sides will reach an agreement on key issues considering that key differences remain.
Experts and the British government believe that a no-deal Brexit will have significant impacts on the UK economy and the GBP/USD. For one, it will lead to more than 300k job losses in 2021 alone and push the overall GDP 2% lower. Indeed, many British firms have started leaving the country. Recently, Goldman Sachs announced that it would shift billions of dollars in assets to Germany.
As such, there is a possibility that the two sides will ultimately reach a deal, albeit at a later date. In a note, analysts at ING wrote that:
“We think a UK-EU trade deal narrowly remains the most likely outcome of talks, but time is not on anyone’s side. A deal would unlock some modest upside for pound sterling, but a lack of risk premium means there is potential for plenty more downside should talks end without an agreement.”
GBP/USD technical outlook
The GBP/USD is trading at 1.3358, which is substantially higher than the yesterday’s low of 1.3223. On the four-hour chart, we see that the average true range (ATR), which is an important measure of volatility has soared.
Also, the price remains relatively below the 25-day and 15-day exponential moving averages. In my view, I suspect that the pair will pullback today and possibly retest the lowest level yesterday. But again, we should expect higher volatility as more headlines stream-in.