Fundamental Forecast for GBP: Neutral

Talking Points:

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Support Holds, Strength Returns to Start Q3

It’s been a positive start to the second half of the year for the British Pound. After a very rough Q2, GBP/USD has continued to string-together a series of gains in the early days of Q3 to push prices back-above the 1.3200 level. The primary driver this week was a set of comments from BoE Governor, Mark Carney, in which he painted a relatively bright picture with the hint towards future rate hikes, and markets are specifically looking at rate decisions in August of November for the next potential move. And while this would normally be a bullish factor for the currency that could continue to drive for weeks if not months leading into that rate decision, the British Pound has a bit of risk hanging over it as we move into the weekend.

GBP/USD Weekly Price Chart: Bounce From Fibonacci Support to Kick-Off Q3

GBP/USD: Carney’s Hawkish Comments Obscured by Brexit Weekend Risk

Chart prepared by James Stanley

The Chequers Summit

This is an important afternoon for Brexit discussions. This is when Theresa May will invite her cabinet to her country estate in Chequers with the goal of hashing out an official ‘UK position’ for Brexit negotiations with the European Union. There are a number of items up for debate, many of which are expected to be contentious in nature as volleyed between by hard-Brexit and soft-Brexit factions. This also brings an incredible amount of uncertainty as, frankly, we don’t know what this official position will look like. The ‘new customs partnership’ and the ‘maximum facilitation’ options have both been rejected, so we’re now looking at the ‘third way.’ We don’t even know what the ‘third way’ actually represents as details have been very slim. So projecting this scenario and how it might impact prices in the British Pound is, at this point, a bit of a stretch.

This meeting is expected to conclude late on Friday evening, meaning that we likely won’t have any details on the discussions until trading has already closed for the weekend – and this exposes the potential for gap risk in GBP when trading opens on Sunday afternoon.

The expectation is that early next week we’ll have an official white paper published by the UK government with each of these positions lined-out. At that point, Brussels will pore through the details and respond; and it’s in that response where FX volatility will likely emanate from. Until then, calculating price movements on this very fluid scenario remains a challenge, and as such, the fundamental forecast will remain as neutral until more clarity is had.

GBP/USD Four-Hour Price Chart: Further Recovery Potential

GBP/USD: Carney’s Hawkish Comments Obscured by Brexit Weekend Risk

Chart prepared by James Stanley

Should this resolve in a GBP-friendly manner, which can be described as a hold above the Fibonacci level at 1.3117, the focus could then move towards future rate policy from the Bank of England and the potential for rate hikes at the August or November Super Thursday rate decisions. The currency doesn’t quite yet have bullish appeal, as we looked at earlier in the week; and at this stage retail sentiment remains heavily long, indicating that we might not yet be at a point where longer-term bullish strategies are yet attractive. This can all shift very quickly, but for traders looking for signals, a bullish break in GBP/USD above the 1.3315-1.3320 area could begin to open the door for topside strategies in the pair.

GBP/USD Remains Stretched to the Long Side With More than Two Traders Long for Every One Short

GBP/USD: Carney’s Hawkish Comments Obscured by Brexit Weekend Risk

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

Forex Trading Resources

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--- Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX