GBP/USD sinking on Brexit time clock and lack of progress on the Backstop

• GBP/USD running out of steam faded at 1.3217 highs. 
• Brexit Secretary Stephen Barclay and senior government officials are due to discuss alternative arrangements to the Irish backstop this week.

Kicking the can down the road is PM May's approach to Brexit of which markets have, for the most part, seen as a positive as it was perceived to be giving the UK more time to find a soft Brexit solution. However, as the clock runs down, markets could switch back to hard Brexit mode and the extra time taken in Parliament might be more widely used to prepare for no deal Brexit by the 29th March.

"The drop in the value of GBP over the past week suggests that investors have become a little more wary about Brexit risks,"

analysts at Rabobank explained. 

The key sticking point is the backstop

Brexit Secretary Stephen Barclay and senior government officials are due to discuss alternative arrangements to the Irish backstop this week.

The Alternative Arrangements Working Group will meet on Monday for the first time since MPs voted to find another way of avoiding a hard Irish border and are likely to go back to looking at technology. However, the Irish PM said the UK was reviewing ideas that had "already been rejected". However, other alternatives that PM will discuss with the EU include, according to BBC news, are:

• a "trusted trader" scheme to avoid physical checks on goods flowing through the border;
• and a "mutual recognition" of rules with the EU.

Time is running out, because the UK is due to leave the EU at 23:00 GMT on Friday 29 March, when the two-year time limit on withdrawal negotiations enforced by the Article 50 process expires, and at this point in time, the EU doesn't look too forthcoming with alternatives to the backstop.

However, Home Secretary Sajid Javid has already said that "existing technology" could be used instead and speaking on the BBC's Andrew Marr Show, he said: "I asked Border Force months ago to advise me to look at what alternative arrangements are possible and they've shown me quite clearly you can have no hard border on the island of Ireland and you can use existing technology - that is perfectly possible...The only thing that's missing is a bit of goodwill on the EU side."

Looking ahead for the week, we will have a number of Fed speakers as Central Banks and data will be key. For that matter, the BoE meets on 7th Feb (UK):

"The MPC is likely to shy away from any major changes of view, with Brexit and the annual update to potential supply assumptions likely to remain unchanged. Effects from a weaker global backdrop on GDP should be offset by the impulse from the November Budget, but an upward sloping futures curve might yield higher inflation forecasts at the two- and three-year points,"

analysts at TD Securities explained. 

GBP/USD levels

"Overall, we would expect the pound to drop to around 12% to 14% or so on a hard Brexit which would take cable towards the 1.14 area and EUR/GBP towards parity,"

 - analysts at Rabobank argued.

• Support levels: 1.3050 1.3010 1.2970
• Resistance levels: 1.3115 1.3150 1.3195

Valeria Bednarik, Chief Analyst at FXStreet explained that the technical picture indicates that the latest GBP/USD decline could be understood as corrective, given that, in the daily chart, it held above a bullish 20 DMA, testing and bouncing a flat 200 EMA Friday:

"Technical indicators continued retreating from overbought territory, holding well above their midlines. In the shorter-term and according to the 4 hours chart, the upside is being capped by a mild bearish 20 SMA currently at around 1.3100, while technical indicators hover around their midlines with diverging directional strength, somehow skewing the risk to the downside without confirming it."