GBP/USD: Bearish Setback As Brexit Headlines Rule

The Sterling has succumbed to the negative headlines around Brexit, making the prospects of a deal a very distant outcome at present time. The heightened political risk in the UK is weighing too, with a snap election in the UK not to be ruled out.

Overall, the outlook has turned bearish for this week. Find below the pros/cons supporting this view as the chart and correlations stand.

PROS:
- A very large daily move on Friday has broken the bullish structure.
- The close and acceptance near the lows is a testament that buying interest, other than via market makers, scalpers, options related, is very low.
- The sharp fall in the Sterling comes in tandem with a collapse in the UK vs US 10yr bond yield spread
- No economic risk events in the UK or US.

CONS:
- The macro picture has improved after the breakout of the 1.30 round number earlier in Sept.
- The EURUSD bullishness may prevent the pair from accelerating its losses as USD flows remain quite limited. Current drive a function of lower GBP vs higher USD.
- The short-term chart is overextended little value to engage at present levels unless you are a scalper or momentum trader.
- Brexit headlines remain a minefield, but as the situation stands, short term looks like risk skewed towards negative outlook.

CONCLUSION:
After all factors considered, the Sterling does not look like an attractive short at current levels but should it retrace into the 38.2 to 61.8% fib area, it may represent an attractive short for those looking to engage in a trade with a decent risk reward. For the market to turn bullish, there should really be a significant change in tone in the negotiations between the UK and the EU, which is not expected in the coming days.