Latest Brexit: Pound rebounds as EU-UK agreement approaches

Brexit business overview:

• In the past few hours, reports have surfaced that the EU and the UK have agreed on a framework for a Brexit deal.
• Will UK Prime Minister Boris Johnson get a deal? The Tory European Research Group (ERG) said it will review the agreement before any recommendations are made to the UK parliament.
• Retail Merchant positioning suggests a mixed bias for GBP rates.

Brexit Agreement… Guaranteed?

The pound sterling is recovering based on several reports (Bloomberg, BBC, The Telegraph) that a Brexit deal between the EU and the UK is close. According to reports, the structure of an agreement was deemed mutually acceptable by the Prime Minister of the United Kingdom, Boris Johnson, and by the President of the EU Commission, Ursula von der Leyen, removing what was evidently the last obstacle to an agreement, the issue fisheries.

Time is running out, however, for the December 31 deadline to be met without further extension. British Prime Minister Johnson, whenever he approves an agreement, will need to approve it in the UK parliament. If the delay in a formal announcement is simply a matter of crossing the ‘t’s and punctuating the’ i’s, then the markets must have a viable legal text for criticism in a matter of days.

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

TECHNICAL ANALYSIS OF GBP / JPY RATE: DAILY TABLE (FROM DECEMBER 2019 TO DECEMBER 2020) (TABLE 1)

Looking and waiting for a Brexit deal, our GBP / JPY forecast through December has remained stable. “GBP / JPY rates were negotiated sideways during the second half of November, but consolidation appears to be taking place in the context of a symmetrical triangle that dates back to the low pandemic of the coronavirus in March. Resistance was found at around 140.01, the Fibonacci retracement of 76.4% from the 2020 high / low range. A penetrating bullish candle on the daily chart on Monday, November 30, suggests that higher pressure remains. Similar to GBP / USD rates, traders should be alert to the potential for upward break in GBP / JPY rates. “

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

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

We usually take a view against the crowd’s sentiment, and the fact that traders are sold suggests that GBP / JPY prices may continue to rise.

Positioning is more sold than yesterday, but less sold last week. The combination of current sentiment and recent changes gives us an even more mixed GBP / JPY trading trend.

TECHNICAL ANALYSIS OF GBP / USD RATE: DAILY TABLE (FROM DECEMBER 2019 TO DECEMBER 2020) (TABLE 3)

GBP / USD rates have not made much progress in the past 48 hours since the Brexit update on Monday. The outlook remains valid. “Although new annual highs were reached last week, resistance has remained in the form of a downward trend line since the highs of November 2007 and July 2014 – that is, even today, with the big bullish hammer candle forming in the daily chart. It was previously noted that ‘violating 1.3539 and sustaining a higher escape movement would indicate that a long-term fund has formed at GBP / USD rates.’ With a Brexit deal in sight, a bullish breakout may soon pick up pace at GBP / USD rates. “

IG client opinion index: GBP / USD rate forecast (23 December 2020) (Graph 4)

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

We usually take a view contrary to crowd sentiment, and the fact that traders are short selling suggests that GBP / USD prices may continue to rise.

Positioning is more sold than yesterday, but less sold last week. The combination of current sentiment and recent changes gives us an even more mixed GBP / USD trading trend.

— Written by Christopher Vecchio, CFA, senior monetary strategist