Tuesday November 17, 2020 - 11:46:07 GMT
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Forex View: Brexit of Bust
With the UK scheduled to leave the EU on December 31, the two sides continue to struggle to agree on a trade deal. However, the price action in sterling (GBP) continues to suggest a bet that there will eventually be an agreement worked out, which would avoid the UK leaving the EU without a deal, otherwise known as a hard Brexit.
This can be seen in the following charts showing a firmer GBP vs. the USD and EUR (note weaker EURGBP indicates a firmer GBP:
Charts courtesy of the Amazing Trader
One reason for the bet on a trade deal being worked out has to do with a history of political negotiations coming down to the wire before an agreement. In this case, the stakes are high with both parties waiting for the other side to blink. So logic says cooler heads will prevail but given the way the market is likely positioned, the surprise and bigger reaction would be if talks fail and the UK leaves with a hard Brexit.
The following is a post from the Global-View Forex Forum by a highly respected member who lays out the risks:
london red 11:10 GMT November 16, 2020 UK, Ireland say breakthrough needed in Brexit talks this week: Reply If you read past the headlines, there has been no progress on the 3 keys issues since the summer, ie fishing, state aid, and governance. The EU has now been releasing officials’ statements trying to split the UK by saying UK chief negotiators Frost isn’t sure how far he can go due to the goings-on at no.10. For those not in the know, there has been a power struggle led by the PM other half, labelled as “princess nut nut” by the right, which has seen the PM take her side and dump Dominic Cummings as chief advisor, who was instrumental in getting MPs to accept Brexit needed to be done. In what was initially thought as a move to the left and to a Brexit deal (Cummings was hard line against a soft deal), has been obliterated by Boris today when he said he is confident the UK can prosper without a deal.
Much of the mkt expects a deal to happen before time runs out, so sterling doesn’t really get hit on these headlines much and stays near its high. However, as we get closer to the end, some hesitation will creep in and the downside moves will get larger. stops will run and the move will feed itself. The conclusion will be a deal of sorts, which will take sterling back to around 5% higher than current levels, or if they fail to get a deal across the line, you will see the move continue quite sharply downwards (for sterling). So if you feel a deal is going to happen it would be advantageous to buy those bigger dips. but be aware that if one isn’t forthcoming, the downside is large since most are on the wrong side of the boat.
So keep an eye on the GBP as a barometer of Brexit sentiment, In this regard, keep an eye on GBPUSD 1.30 and 1.32 and EURGBP .90 as pivotal indicator levels, the latter seen as the key barometer of Brexit sentiment. One way to do this is by getting access to the chart patterns displayed by the Amazing Trader.
Feel free to contact me with any questions or comments.
Jay Meisler, co-founderm global-view.com
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