Sterling may surge if Boris Johnson loses his job

• GBP/USD has dropped amid a bitter divide over Brexit in parliament. 
• Political plotting,  forward-looking PMIs, and the US NFP are eyed.
• Early October’s daily chart is painting a mixed picture. 
• The FX Poll shows that experts are bearish on all time frames.

After the Supreme Court shocked by canceling parliament’s suspension, the House of Commons returned – and with rancorous scenes. The pound dropped on the falling chances of reaching a deal. The political turmoil is set to continue amid the Conservative Party’s conference, a potential ousting of Johnson, and a packed US calendar.

This week in Brexit: Parliament returned with a storm

Lady Brenda Hale – President of the UK Supreme Court – triggered high volatility when she ruled that parliament’s prorogation was unlawful and of no effect. The pound initially rose but then dropped quickly.dropped. A divided House of Commons saw bitter arguments between prime minister Boris Johnson and the opposition – which consists of some of his former Conservative colleagues.

Johnson refused to apologize for proroguing parliament and claimed that to honor the memory of late MP Jo Cox it would be best to pursue Brexit – Cox was a Remain supporter murdered by a nationalist. After viewing the toxic atmosphere, EU officials are less optimistic that a Brexit deal can be reached – or be approved by the House. These reports weighed on sterling. Nevertheless, talks have continued in Brussels.

The opposition – which had its share of shouting – wants to ensure that the UK does not leave without a deal. The Benn bill that it passed was crafted to force the government to ask for a three-month extension to Brexit if parliament fails to approve another arrangement. However, Johnson insisted that the UK will leave the EU by the October 31 deadline while obeying the law –something that seems irreconcilable – raising fears that the government will ignore the law.

That has led some members of the opposition to think that it could become the government instead of telling the government what to do. Nicola Sturgeon, leader of the Scottish National Party (SNP), has suggested that installing a new PM may be the only way to ensure a Brexit extension. However, agreeing on a candidate is no easy task.

Other events: US politics messy as well

The pound has also been hit by dovish comments from Michael Saunders, a member of the Bank of England. Saunders had been supportive of the bank’s intention to raise interest rates after Brexit. However, he has changed his mind and now sees Brexit uncertainty already taking a toll on the economy – leading him to conclude that the BOE may cut interest rates. His shift from hawk to dove may signal a readiness to act sooner rather than later.

Not only Boris Johnson has been under fire. US President Donald Trump has been under fire for allegedly asking Ukraine to dig up dirt on Joe Biden – former Vice President and the Democratic front-runner that may face Trump in the 2020 elections. A whistleblower unveiled Trump’s request in a call to his Ukranian counterpart Volodymir Zelensky. Democrats seized on the opportunity to kick off an impeachment inquiry. The chances for ousting the president are slim, but the allegations – including of trying to cover up the mess – have weighed on sentiment and pushed the safe-haven dollar higher.

The US and China have maintained conversations on a trade deal, and both countries seemed optimistic. However, no reports of a breakthrough have been published.

US data has been mixed. The housing sector shined with better-than-expected sales of new homes, but consumer confidence dropped. Gross Domestic Product was confirmed at 2% in the second quarter but included a downgrade of investment. Nondefense Durable Goods Orders excluding aircraft – the “core of the core” – dropped in August, showing that the slump in investment continues.

UK events: Will the opposition oust Johnson?

The Tory Party’s annual conference is held early in the week despite parliament being in session. Some MPs and aides may have to leave Manchester in order to address MPs in London. Johnson is scheduled to address his party members on Wednesday, and it will be interesting to see if the divisions within the party is also reflected in the membership. Any sign of weakness may trigger volatility.

After the court ruling saved Labour leader Jeremy Corbyn from dealing with its unclear position on Brexit, he may face pressure to put his ambitions to become PM aside and allow an interim leader to oust Boris Johnson and ask for an extension from the EU. While the Scottish National Party is ready to back the hard-left leader, the Liberal Democrats and former Conservative members are unable to stomach him. Margaret Beckett, Harriet Harman, and Keneth Clarke are all veteran MPs that may be sent to 10 Downing Street. Elections would follow a dramatic overthrow of Johnson after a Brexit delay is secured.

While the “rebel alliance” has played its cards well, they are united only in preventing a hard exit from the EU – with little else between them. Ousting Johnson could trigger high volatility and will likely send the pound soaring. However, in the unlikely case that parliament chooses Corbyn as PM – a candidate markets dislike – the pound’s rally may find its limits.

The UK economic calendar features several significant releases that may temporarily move the pound. The final GDP read for the second quarter will likely confirm the annual growth rate of 1.2% – a relatively low level that can be blamed on weakness following preparations for the original Brexit date of March 29.

The Markit/CIPS Purchasing Managers’ Indexes (PMIs) are spread out throughout the week and provide forward-looking guidance to economic developments. The manufacturing and construction sectors are expected to remain in contraction territory – below 50 – while the all-important services sector is on course to show meager growth, just above that level. If the services sector also contracts according to this gauge, the Bank of England will likely face growing pressure to cut rates.

Here are the upcoming UK macro events, as they appear on the economic calendar:

US events: Non-Farm Payrolls and politics

Fresh revelations regarding Trump’s attempts to extract information from a foreign country – and the potential cover-up attempt – will likely dominate US news. However, only if Republicans – both supporters and politicians – turn against the president, markets will notice. The chances of ousting him are slim given his party’s control of the Senate.

China is on holiday most of the week, limiting the scope for headlines related to trade. Nevertheless, tweets from Trump or announcements from other officials may be of interest.

The economic calendar will keep traders busy. ISM Manufacturing PMI is expected to bounce back from below 50 to above that level – showing that the industrial sector continues growing. It also serves as the first hint toward Friday’s all-important Non-Farm Payrolls.

A more significant hint is due out on Wednesday with ADP’s jobs report for the private sector. After showing a substantial rise in August, a more modest increase in jobs is on the cards. The ISM Non-Manufacturing PMI serves as the last clue towards Friday’s labor market figures, and economists forecast a marginal drop from the high levels seen in August. As in the UK and elsewhere, the services sector is outperforming the manufacturing one.

And finally, US Non-Farm Payrolls are expected faster in September after a disappointing increase of 130K in August. That was the second consecutive disappointment in employment. On the other hand, Average Hourly Earnings were robust back then – a monthly increase of 0.4% and 3.2% yearly. More moderate advances are on the cards for September. The data feed into the Federal Reserve’s rate decision later in October.

Here is the list of US events from the FXStreet calendar:

GBP/USD Technical Analysis

GBP/USD has found support at the 50-day Simple Moving Average and continues enjoying upside momentum. On the other hand, it failed to conquer the 100 SMA and trades below the 200 SMA. Moreover, cable dropped below the uptrend resistance line it fought hard to capture earlier in the month. All in all, the picture is mixed.

Initial support awaits at 1.2250, which capped a recovery attempt in early August and almost coincides with the 50 SMA. It is followed by 1.2210, which worked as resistance and then as support in mid-August. Next, we find 1.2150 that was a swing low later that month. 1.2065 is another solid line – holding up the pair twice.

Resistance awaits at 1.2390, which held GBP/USD down and then switched to support in September. Further p, 1.2415 was another support line before the recent collapse. It is followed by 1.2505 and the cycle high of 1.2580 – which also held cable down in July.

GBP/USD Sentiment

If a caretaker PM replaces Johnson, the pound could surge. However, in the more likely case of more bickering, cable could come under pressure – even if US figures disappoint.

The FXStreet Poll is showing a bearish bias on all timeframes with experts significantly downgrading the short-term target while leaving the medium-term and long-term targets intact.

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