GBP/USD - Wide Range To Cover Short Term Eventualities

Just 24h ago I mentioned that, similar to the outlook in the EUR/USD, any downside resolution in the Sterling, unless driven by negative Brexit headlines, would have a hard time finding acceptance sun 1.125.

The reason lies on the increasingly obvious divergence in the UK vs US bond yield spread. Think about it, investors worldwide can exchange their USDs or local currency for GBPs at a major discounted rate, which gives them more firepower to then allocate greater sums into higher-yielding Gilts (UK bonds).

But again, analogous to my explanation on the EUR/USD, the unresolved Brexit issues is a fundamental risk that is keeping the upside (1.27 and above) well capped. The daily candle rejection is the best testament to the view laid out here. It’s basically communicating that the market is far from prepared to find equilibrium at these low levels.

Also, consider the levels of implied vs historical volatility on the Sterling for the next 7 days as a suggestion that the chances of the 1.2750–1.25 to be broken being quite thin. Once the UK parliament reconvenes on Jan 9, and as clearly reflected in implied vols 2 weeks forward and beyond, the risk of a range breakout should creep up on the meaningful vote, due Jan 15th.