Brexit and the pound will be in the spotlight after the latest round of talks between EU and UK representatives started again.
The two parties ideally want to reach a deal as soon as, with the negotiations scheduled to conclude on 2nd October, a couple of months ahead of the end of the transition period. In other words, only one month and a bit is left for the UK and EU to a strike a comprehensive deal. I have a feeling, like other economists, that this is not going to be enough, so the talks may have to be extended and the negotiations may go down to the wire. What’s more, the UK economy is struggling to recover from the pandemic, and with the virus making an unwelcome return to parts of Europe, the UK is in danger of catching the cold again. Against this backdrop, you have to wonder how much further the pound could rise. I certainly would not be surprised if sterling were to turn lower from around the current levels, although equally I wouldn’t rule out the prospects of further short-term gains before the real pain kicks in, in the not-too-distant future. In the slightly long-term outlook, the direction of the pound will depend on the outcome of Brexit negotiations and how well or otherwise the economy will recover from the pandemic.
Source: TradingView.com and ThinkMarkets
From a technical point of view, the GBP/USD has been in a strong uptrend since bottoming out in March, along with other markets. As mentioned, while the rally could continue for a while yet, I am now on the lookout for a potential bearish reversal pattern to emerge – not only because of the above macro concerns, but also because rates have reached technical exhaustion points. For example, the Relative Strength Index (RSI) has recently breached the so-called ‘overbought’ threshold of 70. While the underlying exchange rate has now made a new higher high, the RSI has formed a lower high. This negative divergence is potentially a bearish sign as it points to a waning bull trend. Still, this on its own is not a “sell” signal. The bears must wait patiently for price to confirm what the indicator is pointing to. If we do get a clear reversal pattern such as a
false break above the 2019 high of 1.3515 (should it get there) or a break below the most recent low at 1.3000, then the sellers will have had some confirmation to work with. Until and unless something like that happens, the bulls will remain in control despite price being technically overbought.