To Hold Elections or to Not Hold Elections

While the ongoing saga between Boris Johnson and Jeremy Corbyn continues, the markets are waiting to hear if the EU will grant an extension of a Brexit deal from the “drop dead” date of October 31^st until some time in the future.  As we wait, UK Prime Minister Boris Johnson called on MPs to vote for elections on December 12^th.   UK Labour Leader Jeremy Corbyn has rejected the request,  however he did say “take no deal Brexit off the table, and Labour will absolutely support an election”.  This fluid situation may change if the EU grants the extension.  At this time, the most likely extension will be until January 2020.

But one must consider, is a Brexit deal the most likely outcome, as it may just be a matter of “when”?  And if so, what does that mean for the GBP?  Clearly, market participants did not like the day’s proceedings as GBP/USD is down -0.5% on the day near 1.2850.  The pair is consolidating in a rather large resistance zone between roughly 1.2790 and 1.3012 and is holding above (retesting?)  a major downward sloping trendline which come across near 1.2730. 

Source: Tradingview, City Index

On a 240-minute time frame,  a flag formation is clearly visible as the RSI unwinds from overbought conditions.  Depending on the timing of the breakout of the flag (and if it happens), the target could be near 1.3600.  The pair has currently retraced to the 23.6% Fibonacci retracement level from the low on October 10^th to the highs on October 21^st.  If GBP/USD holds above the 38.2% Fibonacci retracement level at 1.2705, it would be constructive for the pair.  The 1.2705 level is also horizontal support.  Below there is a support zone between the 50% Fib retracement level and the 61.8% Fib retracement level (1.2521/1.2613).  If price breaks through 1.2520, we could be back down to the recent lows near 1.2200 in a hurry.

Source: Tradingview, City Index