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By: Stuart Cowell
The Pound has continued to trade neutrally, lacking domestically-driven directional impetus. The UK currency was a big underperformer during the global lockdowns earlier in the year and is again vulnerable given the trend to ever-tightening restrictions and national lockdowns across both the UK and Europe.
The UK needs foreign capital inflows to offset outflows generated by the UK’s large current account deficit. The Brexit endgame is also in the mix. Negotiations are continuing, and the teams are reportedly working to a mid-November deadline. Market participants are cautiously optimistic that at least a narrow free trade deal will be reached, but still await concrete news that the two sides have reached a breakthrough on the key sticking points. With a no-deal scenario now looking much less of a risk, the question now is more focused on how limited or how broad a deal might be between the EU and UK. The consensus is for a narrower rather than a broader deal, and we concur with this, though it should also be considered that the EU and UK might conceivably surprise everyone with a much more comprehensive deal than is generally being expected. The Covid situation may be a motivation for this, and it should be remembered that the two sides are starting from perfect equivalence, so a broad agreement is feasible. Even some Brexit ideologues in the UK have suggested that maintaining close alignment with EU rules — for now — may be the more pragmatic way forward given the Covid crisis, before diverging from EU rules in an evolving process over time. The central criterion for the pound’s future trajectory will be what impact any deal has on the UK’s terms of trade. The narrower any trade deal is, the bigger the impact on the UK’s trading position will be on January 1.
Technically and psychologically 1.3500, 1.3000, and 1.2500 are fundamental for Cable. The Q1 pandemic falls from 1.3200 to 1.1500, took until mid-September before they were fully recovered, and breached (1.3350) but once again they have proved a move too far. The last 6 weeks have seen the pair pivot below 1.3000 and tests of the trendline support. The 38.2 Fib and 50-period moving average at 1.2750 is currently key downside support. A break and hold of recent 1.3175 highs will be required to move the pair higher.
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