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FX Week Ahead: Brexit Deal Deadline & EUR/GBP Rate Forecast

FX Week Ahead: Brexit Deal Deadline & EUR/GBP Rate Forecast

Christopher Vecchio, CFA, Senior Strategist
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Brexit Deal Deadline Overview:

  • Will a Brexit deal be reached? EUR/GBP rates don’t seem to think so. But any outcome is still possible as UK PM Johnson heads to Brussels.
  • EUR/GBP rates have struggled to gain traction one way or the other in recent weeks, producing choppy trading conditions.
  • Retail trader positioning suggests a bullish bias to EUR/GBP rates.

EARLY WEEK | Brexit Deal Between EU and UK

Is this the end of the Brexit saga? For several weeks, it appeared that a deal would be reached in order to avoid the worst case scenario ‘no deal, hard Brexit’ outcome. And while it seemed highly unlikely that either EU or UK Brexit negotiators and political leadership would walk away from discussions due to competition issues or fisheries…here we are.

Failure to reach a free trade agreement will bring about the ‘hard Brexit’ scenario feared, intensifying the negative impact of increased tariffs and import taxes faced by the UK. The economic backlash from Brexit would be harsh, make a coronavirus pandemic recovery all the more difficult.

UK Prime Minister Boris Johnson was reportedly on his way to Brussels to try and get a deal done, at the time this report was written.

Pair to Watch: EUR/GBP

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EUR/GBP RATE TECHNICAL ANALYSIS: DAILY CHART (DECEMBER 2019 TO DECEMBER 2020) (CHART 1)

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EUR/GBP rates remain rangebound, insofar as the sideways churn between 0.8865 and 0.9292 has continued despite breaking the rising trendline from the February and September swing lows (effectively the pandemic trendline). What appeared to be a chart pattern explicitly favoring an outcome that could produce more British Pound strength – the symmetrical triangle bearish breakout – has not found significant follow through.

Attention now turns to a potential bullish reversal in the context of the symmetrical triangle. EUR/GBP rates have rallied back to resistance, the rising trendline from the February and September swing lows. Achieving rates through said trendline would increase the odds of a test of range resistance at 0.9292.

However, it’s important that traders remain patient. After all, EUR/GBP rates have been trading sideways since late-June, and until the broader range support or resistance give way, there’s little technical rationale for expecting a considerable directional move.

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IG Client Sentiment Index: EUR/GBP Rate Forecast (December 7, 2020) (Chart 2)

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EUR/GBP: Retail trader data shows 34.86% of traders are net-long with the ratio of traders short to long at 1.87 to 1. The number of traders net-long is 12.81% lower than yesterday and 29.35% lower from last week, while the number of traders net-short is 37.97% higher than yesterday and 10.80% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/GBP prices may continue to rise.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/GBP-bullish contrarian trading bias.

Read more: Euro Rally Pauses as Brexit Lingers - Outlook Remains Bullish for EUR/USD, EUR/JPY Rates

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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