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Brexit Latest: Deal Optimism Stokes British Pound Rally - Levels for EUR/GBP, GBP/JPY, GBP/USD

Brexit Latest: Deal Optimism Stokes British Pound Rally - Levels for EUR/GBP, GBP/JPY, GBP/USD

Christopher Vecchio, CFA, Senior Strategist

Brexit Latest News:

  • Although an October 15 deadline arrives tomorrow, both EU and UK leadership have expressed optimism that a deal will get done soon; comments by German Finance Minister Olaf Scholz suggested a last minute deal would be possible.
  • While some technical hurdles remain, the British Pound is beginning to get into position to attempt breakouts in EUR/GBP, GBP/JPY, and GBP/USD.
  • Retail trader positioningsees conflicting signals among the majors GBP-crosses.
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British Pound Perks Up on Deal News

UK Prime Minister Boris Johnson’s self-imposed October 15 deadline is due to arrive tomorrow, but no one seems to care. With competition rules and fisheries as the remaining sticking points, comments from both EU and UK Brexit negotiators and political leadership suggest that a deal may soon be around the corner – even if another arbitrary deadline comes to pass.

And while it’s true that a deal does need to be signed by December 31, with an EU summit this week, it seems highly unlikely that either EU or UK Brexit negotiators and political leadership walk away from discussions. A potential fly in the ointment for the British Pound after a Brexit deal is achieved? Support for a second Scottish independence referendum have hit an all-time high.

GBP/USD Rate Technical Analysis: Daily Chart (October 2019 to October 2020) (Chart 1)

Brexit Latest: Deal Optimism Stokes British Pound Rally - Levels for EUR/GBP, GBP/JPY, GBP/USD

GBP/USD rates are contending with a bearish evening star candle cluster over the prior three trading days, but the optimistic comments from German Finance Minister Scholz have helped spark a turn higher. Now, GBP/USD rates are working on a daily bullish piercing candle while turning higher through the 23.6% Fibonacci retracement of the 2020 low/high range. Resistance overhead remains formidable: the descending trendline from the April 2018 and December 2019 highs; and the underside (former support, now resistance) of the rising trendline from the March and June swing lows – effectively the pandemic trendline.

IG Client Sentiment Index: GBP/USD Rate Forecast (OCTOBER 14, 2020) (Chart 2)

Brexit Latest: Deal Optimism Stokes British Pound Rally - Levels for EUR/GBP, GBP/JPY, GBP/USD

GBP/USD: Retail trader data shows 51.29% of traders are net-long with the ratio of traders long to short at 1.05 to 1. The number of traders net-long is 2.07% higher than yesterday and 5.30% higher from last week, while the number of traders net-short is 25.19% lower than yesterday and 14.18% lower from last week.

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

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

GBP/JPY Technical Analysis: Daily Rate Chart (October 2019 to October 2020) (Chart 3)

Brexit Latest: Deal Optimism Stokes British Pound Rally - Levels for EUR/GBP, GBP/JPY, GBP/USD

GBP/JPY rates have been steadily climbing throughout the second half of October, in part driven by the gains seen in global equity markets. And while the prior three trading days did not expressly produce a bearish evening star candle cluster akin to GBP/USD, yesterday’s bearish piercing candle appeared daunting. But with the doji emerging on the daily candle today, at two key Fibonacci levels – the 38.2% retracement of the 2018 high/2020 low range and the 61.8% retracement of the 2020 high/low range – it appears that more upside may be possible. While there may be significant chop in price action over the next few weeks, traders should be on alert for gains towards 140.00, where meaningful resistance will come into play in the form of the descending trendline from the 2018 and 2019 highs.

IG Client Sentiment Index: GBP/JPY Rate Forecast (OCTOBER 14, 2020) (Chart 4)

Brexit Latest: Deal Optimism Stokes British Pound Rally - Levels for EUR/GBP, GBP/JPY, GBP/USD

GBP/JPY: Retail trader data shows 46.70% of traders are net-long with the ratio of traders short to long at 1.14 to 1. The number of traders net-long is 22.69% lower than yesterday and 21.37% lower from last week, while the number of traders net-short is 2.78% lower than yesterday and 5.00% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBP/JPY 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 GBP/JPY-bullish contrarian trading bias.

EUR/GBP Technical Analysis: Daily Rate Chart (October 2019 to October 2020) (Chart 5)

Brexit Latest: Deal Optimism Stokes British Pound Rally - Levels for EUR/GBP, GBP/JPY, GBP/USD

EUR/GBP rates are creeping lower towards the rising trendline from the February and September swing lows, effectively the pandemic trendline. But unlike GBP/JPY and GBP/USD, EUR/GBP rates are more explicitly favoring an outcome that could produce more British Pound strength. A bearish outside engulfing bar has emerged on the daily timeframe, as EUR/GBP rates have cut through the 38.2% Fibonacci retracement of the 2020 low/high range at 0.9034. To this end, should EUR/GBP rates fall below 0.8990, the pandemic trendline would break, suggesting a bearish outcome to the multi-month symmetrical triangle.

IG Client Sentiment Index: EUR/GBP Rate Forecast (OCTOBER 14, 2020) (Chart 6)

Brexit Latest: Deal Optimism Stokes British Pound Rally - Levels for EUR/GBP, GBP/JPY, GBP/USD

EUR/GBP: Retail trader data shows 45.33% of traders are net-long with the ratio of traders short to long at 1.21 to 1. The number of traders net-long is 18.42% lower than yesterday and 9.64% lower from last week, while the number of traders net-short is 2.53% higher than yesterday and 13.37% lower 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.

Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/GBP trading bias.

--- 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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