Photo - Andreas Zanin
Andreas Zanin
Analysis | September 29, 2020

KTM FX Weekly: Reduced No-deal Brexit chances

The pound soared across the board to start the week as UK-EU trade talks resume. Overnight GBP strength sees EURGBP briefly fell to 0.9020 but fully recovered by the end of the day. We found two factors behind the pound strength.

Deal optimism: Final round of UK-EU talks begin this week ahead of October 15 EU leaders’ summit. FT said, “Team will meet on Tuesday for three days of talks at the EC’s headquarters in Brussels, with a month remaining until what EU chief negotiator Michel Barnier has said is the “realistic deadline” for a deal. “

 Negative rates: Bank of England Deputy Governor Ramsden hosed down the possibility of the policy rate going negative in the near term, saying that it is going to take some time to do the technical work, “there is still a lot to investigate on how it could be implemented.” This followed weekend comments by fellow MPC member Tenreyo who saw “encouraging” evidence on the impact of negative rate policy.

 Data review: In terms of the UK macro data from last week, UK recovery loses momentum in September, and business outlook drops to its weakest since May.

  • Sep Flash UK Manufacturing PMI registered at 54.3, 2-month low vs. Aug 55.2.
  • Sep Flash UK Services Business Activity Index Sep: 55.1, 3-month low vs. Aug 58.8.

The week ahead: We will see the final official reading on the UK Q2 GDP on Wednesday. We expect the final would be around the preliminary number of -20.4%.

In the UK, GDP is estimated to have fallen by 20% in 2020 Q2. That was by far the largest quarterly fall on record. The ONS estimated that the level of UK GDP in 2020 Q2 was 22% lower than in 2019 Q4.

In its latest BOE meeting, the MPC highlighted that “The outlook for the economy remains unusually uncertain.”

Returning to the Brexit negotiations, this week, we have the final round/ninth round of negotiations, and the outcome would be less pessimism, i.e., bullish GBP. Our models like GBP against CHF and USD.

We remain cautiously NEUTRAL on EURGBP, as we continue to study the action.

TECHNICAL OVERVIEW

The cross is approaching interesting support here at 0.9020-0.8990. The area includes the 100MA and ABC targets. So all in, a fairly thick congestion area. 

The corrective A-B-C pattern suggests 0.9000 would be pivotal for EURGBP. Across the asset classes, the 100 simple moving average is providing solid support on the daily chart. Readers can look at the daily charts of Brent, Bitcoin, Gold, Silver, AUDUSD, GBPUSD, and NZDUSD. In indices, the S&P 500 is also bouncing back from the 100MA. Turning back to our subject currency, the cross re-tested the 100MA overnight and managed to close higher.

The cross is now testing the key support level provided by the 100MA and wave C of the corrective pattern. A decisive break below 0.8990 would open further to 0.8960 and 0.8880.

If the price is moving higher, watch out for resistance at 0.9100 and 0.9220.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

What is your Technical View?

Do you have a different idea? Please leave us a comment and get an answer from our professional analysts

Latest Article
Improve your trading with a True ECN Broker
Trading account overview