So, all eyes will be on UK Prime Minister Theresa May today as she delivers a key speech on Brexit in Florence. May is expected to lay out the UK government’s long term strategy for Brexit and unlock negotiations with the Europeans by specifying the size of the divorce bill that the UK is willing to pay. In addition, she will probably ask for a transition period which will assure access to the Customs Union and Single Market once the UK officially leaves the European Union in March 2019.
Whether and how the pound may react will depend to a large degree on the hard vs. soft Brexit rhetoric from the PM. A soft split from the EU would probably provide the pound some support and may trigger another rally in sterling. Anything but that could lead to some profit-taking after the cable sharp rally last week as a result of a hawkish Bank of England.
Indeed, the GBP/USD may have gone up too far too fast to be able to sustain its rally without at least a pause or a small retracement. This is highlighted, for example, by the daily RSI reaching ‘overbought’ levels of >70. But this alone does not necessarily point to a drop, as so far none of the key support levels have broken down to suggest the buyers are losing control. However, that could change in the event price falls below the 1.3445-1.3505 key support area, perhaps as a result of May’s speech today. But even if this were to happen, we would expect the pullback to be limited due to a now hawkish Bank of England.
Perhaps the best that could happen for the cable is more consolidation around current levels. This would help the RSI to unwind from overbought levels through time rather than price, which would be bullish. In any event, any sustained break above the 1.3615-1.3650 range could pave the way for further near-term gains. If this were to happen, the cable may then rise towards the next bullish objectives at 1.3835/55, followed by 1.4000/4050 area next. The first of these two targets marks the convergence of the long-term 61.8% Fibonacci retracement level with the February 2016 low. The second target, as well as being a psychologically-important level, marks the pre-Brexit vote low. I can’t see the cable going north of 1.40 in the medium term, given the ongoing Brexit uncertainty.
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