The pound has remained near the highs as we head towards the London close, following earlier news that the UK government was likely to continue trade talks with the EU beyond Boris Johnson’s self-imposed deadline of October 15.
As sterling has become heavily headline-driven on Brexit-related headlines, it was hardly surprising to see the GBP/USD and other pound crosses turn positive earlier, despite growing concerns about the economic impact of the second wave of the coronavirus. Bloomberg reported that the UK has signalled it won't walk away from EU trade talks immediately. The Telegraph’s James Crisp said in a tweet that “David Frost will tell Boris Johnson that deal is still possible when he briefs PM on Brexit talks.” Accordingly, the PM will delay a decision on whether to quit the Brexit trade negotiations until after the European Council summit ends on Friday, said the Telegraph.
So, you get the feeling that the UK Prime Minister secretly feels his bluff has been called and will now think twice about threatening to walk away from negotiations. Yet, nothing has been agreed on. The situation remains clear as mud. The pound is thus likely to remain pretty-much headline driven for a while yet. Traders speculating on sterling will need to remain nimble
Indeed, headlines from the other side of the English Channel have been contradictory. On the one hand, it was reported that EU leaders have said there has been no breakthrough in Brexit talks and that they will step up preparations for a no-deal exit. On the other hand, Angela Merkel’s latest remarks have been more encouraging, with the German chancellor saying the EU would have to be more “realistic” in compromising on fishing rights and adding that a deal has to be “in British interests as well as the interests of the 27-member EU”.
The UK PM had previously said he will walk away from the talks if there was no clear progress in the talks by Thursday. However, it looks like that decision will now be pushed back by at least a day after this week’s meetings end. Mr Johnson is set to discuss the state of the negotiations with European Commission president Ursula von der Leyen later on Wednesday.
The latest developments will not remove Brexit uncertainty by much, but pound traders have warmed to today’s headlines overall as they suggest the chances for a no-deal exit have been reduced, providing some breathing space for the currency. It is likely that the pound will remain headline-driven until the UK’s position becomes very clear. But judging by today’s price action, traders are pricing out the risks of a no-deal exit slightly.
From a technical point of view the cable retains its bullish bias in what has been a rather messy bullish trend:
Source: ThinkMarkets and TradingView.com
Following today’s recovery, the GBP/USD is in the process of forming a potential bullish engulfing or similar candle on the daily time frame. It is worth noting that it is encouraging to see the buyers are stepping in where they should, with the 21-day exponential average, for example, providing support. A close around current levels or higher would increase the likelihood for a continuation of the rally towards the next resistance at 1.3140. Thereafter, there are not many obvious resistance levels until the 1.35 area, where the cable has created the highs for 2019 and, so far, this year as well.
However, in the event the rally falters again and rates go on to break the most recent low at 1.2845, then at that point the bullish bias would become invalidated in the short-term outlook. Under this potential scenario we could then see fresh technical selling below that level to potentially take us back down to the 200-day moving average (1.2710) or to take out liquidity below the recent low at 1.2676.