GBP/USDFUNDAMENTAL HIGHLIGHTS:
GBP/USD at 1.35: Another week passes by, another week closer to the end of the transition period and still no agreement has been reached between the EU and UK. That said, as market participants await the outcome of negotiations ahead of the EU Summit, this has not stopped GBP/USD pricing in trade deal as the pair hit a 1yr high at 1.3500. Although, it is worth noting the weaker USD narrative has also been at play for GBP/USD.
Is a Brexit Breakthrough Near?: While progress has appears to have been made, the three key issues surrounding fisheries, governance and level playing field are yet to be resolved. Although, there have been signs of movement from the UK on the level playing field, according to Politico. As such, there is a sense that this could allow for France to back down on demands over fishing access and thus paving the way for an agreement. As it stands, talks are expected to spill over into the weekend, raising gap risk for GBP pairs. Therefore, with headline risk elevated for GBP, it would be prudent to be nimble and to remain disciplined.
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How Much GBP Upside is Left?: If you had ask analysts just a few weeks ago where GBP/USD could go on the back of a trade deal, most would have had 1.35 as the target. The past week, GBP/USD has hit 1.35 and still no agreement has been reached, but with the benefits of a trade deal reflected in the price to some extent. The question I’m asking myself, is how much more is left in the tank in the short term on the back of a Brexit breakthrough and perhaps from current levels gains may be more modest towards 1.37, but I would not rule out a “buy the rumour, sell the fact” type reaction. That in mind, the option market has also diverged notably from spot GBP as option markets hedge for downside protection.
GBP/USD vs 1-Month Risk Reversal
Source: Refinitiv
Upcoming Brexit Risk Events
Dec 10-11th: EU Summit
Dec 14-17th: European Parliament Meets for Final Time in the Year
Dec 31st: End of the Transition Period
EUR/GBP Levels to Watch
Source: Refinitiv
