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GBP/USD Weekly Forecast: Is a Brexit Breakthrough Imminent?

GBP/USD Weekly Forecast: Is a Brexit Breakthrough Imminent?

Justin McQueen, Strategist

GBP/USDFUNDAMENTAL HIGHLIGHTS:

  • GBP/USD at 1.35
  • Is Brexit Breakthrough Near?
  • How Much GBP Upside is Left?

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.

For a comprehensive look at trading discipline, check out the traders guide to trading psychology

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

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

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