The GBP/USD has consolidated around 1.2750 support, trying to build up a stronger momentum. The U.K. government will hold a vote on its Brexit deal in the House of Commons on January 15, confirming the British Prime Minister Theresa May’s statement over the weekend.
Until then, Theresa May will be making her last attempts to amend the current deal, particularly the agreement on the border that separates Northern Ireland and the Republic of Ireland. This is where the most painful ‘backstop’ deal comes in - the regulation allowing Northern Ireland to stay within the EU Customs Union and the single market and to avoid a hard border – physical infrastructure and customs checks between Ulster and the Republic of Ireland after Brexit. Despite the statements made by the Prime Minister, it’s worth taking into account that the EU has already expressed its opinion regarding Brexit terms by finalizing the deal during the Summit held on November 25.
Theresa May is facing growing criticism and serious political pressure, which significantly reduces her chances to win the loudest political "divorce" in recent years. Market participants are on their toes ahead of a long-awaited January 15, when May will most likely suffer a crushing defeat and the Brexit deal will be rejected by the Parliament. In this scenario, Britain will be forced to leave the EU failing to maintain its access to the single European market, and the British pound could be facing protracted fundamental weakness.
According to preliminary estimates, the consequences of a hard Brexit could turn out to be far more devastating for the UK economy than the 2008 global financial crisis. Anticipating a potential economic collapse, financial companies have already moved more than $1 trillion in assets out of the UK. These figures were provided by Ernst & Young, which studied public statements of 222 major players of the British financial services sector. As of the end of November, 36% of the financial services firms surveyed by EY confirmed their plans to move some of their operations from London to other European capitals. More than half (55%) of investment banks, some brokerage companies, 44% of the wealth and asset managers, and 42% of insurance companies EY followed are getting ready to flee from London. Nearly one third (30%) of the companies named Dublin, Luxembourg, Frankfurt and Paris as the most attracted locations for shifting their assets and employees.
Apart from the obvious political uncertainty in the UK, Sterling’s additional pressure may be caused by a stronger dollar. The market is now closely watching trade talks between China and the United States as they seek the way out of a damaging trade war and attempt to restore a trade balance between the world’s two largest economies. Market players are encouraged to see the negotiations between the two parties still going, especially in the light of the upcoming expiration of the current trade deal in March. If U.S.-China trade talks wrap up successfully, it’ll eliminate the main global economic growth fear and therefore will be seen as a positive factor for the dollar.
Taking all of the above, we have good reasons to anticipate a large-scale bearish rally in the GBP/USD pair, which can commence as soon as by the end of this week. A long-term decline target is located at 1.20 support.