The Final Round


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By: Andria Pichidi

The Pound has picked up some demand, which has seen Cable lifted 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 they expected to last for 3 days however this depends on whether enough progress could be made in order to enter the next phase of talks.

However, there remains a palpable risk that only a bare-bones trade deal will reach, 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. Localized lockdowns now affect 17 mln people in the UK. As with most other European countries, the surge in positive test outcomes is not being accompanied by anything like a corresponding rise in hospitalizations/mortality, although a 3/4 week lag should 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 build 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, support this view.

Meanwhile, as stimulus and Brexit hopes to seem to be trumping virus developments,  BoE MPC member Tenreyro, said that she has seen “encouraging” evidence on negative interest rates, however this had 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 0.8850 low to 0.9290 area 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 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 could pause 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 the signal line but hold well above the zero barriers, RSI is at 45 pointing lower, while the short-term Stochastic has enter the OS area post a bearish cross on Thursday. Next Support level set at  0.9035 (61.8% Fib.), 0.9000 (psychological level & 100% FE) and 0.8970 (76.4% Fib.).

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