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Brexit Latest: British Pound Rallies as EU-UK Agreement Nears - Levels for GBP/JPY, GBP/USD

Brexit Latest: British Pound Rallies as EU-UK Agreement Nears - Levels for GBP/JPY, GBP/USD

Christopher Vecchio, CFA, Senior Strategist
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Brexit Deal Overview:

  • Over the past few hours, reports have emerged that the EU and UK have agreed to a framework for a Brexit deal.
  • Will UK Prime Minister Boris Johnson get a deal? The Tory European Research Group (ERG) has said that it will review the deal before any recommendation is made to UK parliament.
  • Retail trader positioning suggests a mixed bias to GBP rates.

Brexit Deal…Secured?

The British Pound is rallying on the back of multiple reports (Bloomberg, BBC, The Telegraph) that an EU-UK Brexit deal is within reach. According to reports, a framework of a deal has been found mutually agreeable by UK Prime Minister Boris Johnson and EU Commission President Ursula von der Leyen, removing what was evidently the last obstacle to an agreement, the issue of fisheries.

The time is ticking, however, if the December 31 deadline is to be respected without another extension. UK PM Johnson, whenever he gives his blessing to a deal, will need to get it through the UK parliament. If the delay in a formal announcement is simply a matter of crossing the ‘t’s and dotting the ‘i’s, then markets should have a viable legal text for critique in a matter of days.

The highly influential Tory European Research Group (ERG) has already commented that it will review the deal before any recommendation is made to the Tory party and the UK parliament broadly. If and when the Tory ERG gives consent for the deal, the UK parliament will need to ratify the agreement – as will every other parliament in every other EU country. And that all needs to happen before December 31.

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

Brexit Latest: British Pound Rallies as EU-UK Agreement Nears - Levels for GBP/JPY, GBP/USD

Watching and waiting for a Brexit deal, our GBP/JPY forecast through the month of December thus far has held steady. “GBP/JPY rates have traded sideways through the second half of November, but the consolidation appears to be occurring within the context of a symmetrical triangle dating back to the March coronavirus pandemic low. Resistance has been found around 140.01, the 76.4% Fibonacci retracement of the 2020 high/low range. A bullish piercing candle on the daily chart on Monday, November 30 suggests that topside pressure remains. Similar to GBP/USD rates, traders should be on alert for bullish breakout potential in GBP/JPY rates. “

IG Client Sentiment Index: GBP/JPY Rate Forecast (December 23, 2020) (Chart 2)

Brexit Latest: British Pound Rallies as EU-UK Agreement Nears - Levels for GBP/JPY, GBP/USD

GBP/JPY: Retail trader data shows 40.83% of traders are net-long with the ratio of traders short to long at 1.45 to 1. The number of traders net-long is 7.77% lower than yesterday and 7.77% lower from last week, while the number of traders net-short is 18.35% higher than yesterday and 12.54% lower 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.

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 GBP/JPY trading bias.

GBP/USD RATE TECHNICAL ANALYSIS: DAILY CHART (DECEMBER 2019 TO DECEMBER 2020) (CHART 3)

Brexit Latest: British Pound Rallies as EU-UK Agreement Nears - Levels for GBP/JPY, GBP/USD

GBP/USD rates have not made much progress over the past 48-hours, since the Brexit update on Monday. The outlook remains valid. “Although fresh yearly highs were achieved last week, resistance remained in the form descending trendline from the November 2007 and July 2014 highs – that is, until today, with the large bullish hammer candle forming on the daily chart. It’s been previously noted that ‘breaching 1.3539 and sustaining a breakout move higher would indicate a long-term bottom has formed in GBP/USD rates.’ With a Brexit deal in sight, a bullish breakout may soon gather pace in GBP/USD rates.”

IG Client Sentiment Index: GBP/USD Rate Forecast (December 23, 2020) (Chart 4)

Brexit Latest: British Pound Rallies as EU-UK Agreement Nears - Levels for GBP/JPY, GBP/USD

GBP/USD: Retail trader data shows 46.30% of traders are net-long with the ratio of traders short to long at 1.16 to 1. The number of traders net-long is 6.48% higher than yesterday and 45.00% higher from last week, while the number of traders net-short is 13.51% higher than yesterday and 20.44% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBP/USD 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 GBP/USD 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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