The pound has been a top riser in the FX markets so far in today’s session. The gains have come on the back of optimism that a breakthrough in Brexit talks is close, which may mean the UK will avoid a no-deal exit after all.
The EU's chief negotiator told the European Parliament that "an agreement is within reach if both sides are willing to work constructively." Barnier added: "We will seek the necessary compromises on both sides in order to reach an agreement and we will do so right up until the last day until it's possible to do so. Our doors will remain open until the very end."
The pound tends to respond more profoundly to comments by top EU officials, rather than UK, since warnings by the latter is not taken too seriously by market participants as everyone knows Boris Johnson and co are merely talking tough because it is part of their negotiation tactics and they are tasked to get the best deal possible for the UK. Consequently, this morning’s comments from Michelle Barnier holds more weight in the eyes of investors and traders, speculating on the pound.
And that’s exactly how the markets have interpreted Barnier’s comments, judging by the pound’s reaction. What’s more, the UK government also thinks Barnier’s comments were significant. A UK government spokesperson confirmed that there will be more Brexit talks again later on and that the UK 'notes with interest' the comments made by Barnier earlier on the issues behind current difficulties in trade talks.
Brexit talks had stalled last week after the UK government put formal negotiations on hold until the EU made a signal that it is ready to make concessions. Well, today we might have had that soft signal, but we now need to see a real breakthrough in the stalemate. Let’s see how things will pan out over the next few days.
But investors are now more convinced that a deal will be struck sooner or later, rather than not at all.
The cable has broken back above the 1.30 handle and the fact that it is holding above the 21-day exponential average means the path of least resistance continues to remain to the upside:
Source: ThinkMarkets and TradingView.com
As before, the next bullish objective remains at 1.3140, the point of origin of the breakdown in early September. If that level breaks and there’s acceptance above it, then we could see an accelerated move to take out liquidity above the highs of this year and 2019 around the 1.35 handle next.
Meanwhile in the event of a failure, the downside move could be equally fast. Under this potential scenario, a potential break below the recent lows at 1.2855 would be a bearish development and could then lead to fresh technical selling towards the 200-day average and old lows circa 1.2675 next. For this bearish scenario to pay out, I think it would require some assistance from the ongoing Brexit situation – namely, a collapse in talks.