The Pound has picked up some demand, which has seen Cable lift back above 1.2800 and EURGBP drop back under 0.9100. This comes with an FT article reporting that there are tentative signs of progress into the final round of form trade talks between the EU and UK, which will take place in Brussels this week. The talks will start on Tuesday and are expected to last for 3 days, however this depends on whether enough progress is made in order to enter the next phase of talks.
However, there remains a palpable risk that only a bare bones trade deal will be reached, and a possibility that the UK will leave the single market at year-end with no deal at all. In either of these scenarios, negotiations would continue next year, so the matter wouldn’t be closed, but the near- to medium-term impact on the UK could be significant.
There is a view that PM Johnson has no intention of leading the UK out of the EU’s single market without a deal and reneging on the Withdrawal Agreement, given the significant economic and political cost it would entail.This view has been, at least up until now, preventing the Pound from seeing more extensive losses. It should be remembered though that Johnson’s cabinet is loaded with Brexit ideologues, and the EU is not likely to accept the unilateral overwriting of the Withdrawal Agreement.The controversial Internal Market Bill (which proposes legislation that overwrites parts of the Withdrawal Agreement) remains in process in the UK’s parliament, and passage through the House of Lords remains a potential obstacle.
Another consideration is the increasing level of restrictions in the UK in response to the surge in positive Covid tests. Localised lockdowns are now affect 17 mln people in the UK. As with most other European countries, the surge in positive test outcomes is not being accompanied with anything like a corresponding rise in hospitalisations/mortality, although a 3/4 week lag could be observed. If the discordance between positive tests and illness/mortality persists (the tentative reasons include a false positive test rate combined with rising numbers of tests, alongside a buildup of much greater population immunity than is being assumed currently (antibody testing only paints part of the picture), then there would be a chance, at some point, for a policy relaxation. Pressure on PM Johnson from his own party, and news that he spoke to the Swedish government’s anti-lockdown/anti-facemask scientific advisors, supports this view.
Meanwhile, as stimulus and Brexit hopes seem to be trumping virus developments, BoE MPC member Tenreyro said over the weekend that there is “encouraging evidence on negative rates”, which will keep speculation that the central bank will be forced to join the negative rate club alive, although BoE’s Ramsden said in an interview from September 20 that the central bank is still evaluating options and that a move to negative rates is not “imminent.” However these reports have been ignored by the Pound as it sustains a rally today.
Interestingly, we have seen EURGBP today breaking some significant technical levels such as 20-day SMA, 61.8% Fibonacci extension since September’s rebound and reversing more than 50% of the gains seen from the 0.8850 low to the 0.9290 area between 3-11 of September. This reversal has formed long lower tails in the daily chart and a gap lower and turned a bullish medium term outlook into a negative one. Currently the sell off is being tested by the 50-day SMA Support level at 0.9050, but the 61.8% retracement level at 0.9035 could be the one that pauses the 4-day selling pressure.
Momentum indicators are still in their corrective configuration and suggest that short term drifts are going to end. AMCD lines turned below signal line but hold well above the zero barrier, RSI is at 45 pointing lower, while the short-term Stochastic has entered OS area, posting a bearish cross on Thursday. Next Support level is set at 0.9035 (61.8% Fib.), 0.9000 (psychological level & 100% FE) and 0.8970 (76.4% Fib).
Click here to access the Economic Calendar
Andria Pichidi
Market Analyst
Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
