Brexit noise might continue to infuse volatility

  • Renewed hopes for a last-minute Brexit deal provided a goodish lift to the sterling on Wednesday.
  • The positive momentum faltered in absence of any concrete outcome from Johnson/VDL meeting.
  • Investors eye important macro releases from the UK and the US for some trading opportunities.

The GBP/USD pair gained some strong positive traction on Wednesday, albeit struggled to capitalize on the move and finally settled around 75-80 pips off weekly tops. The optimism over additional US fiscal stimulus measures and the COVID-19 vaccine kept the US dollar bulls on the defensive, which, in turn, extended some initial support to the pair. The British pound got an additional boost after the UK Cabinet minister, Michael Gove said that there can be scope for compromise on fishing right. Adding to this, German Chancellor Angela Merkel hinted that the EU will be willing to compromise on the level-playing field.

The positive headlines come on the back of news on Tuesday that the British government has dropped controversial clauses in its UK Internal Market Bill. This, in turn, raised prospects for a Brexit deal and forced investors to unwind their bearish GBP bets ahead of a key summit between UK Prime Minister Boris Johnson and European Commission President Ursula von der Leyen. However, comments from an EU diplomat, saying that that the expected outcome of the von der Leyen/Johnson meeting is to agree that more talks are needed and to signal that a deal is still possible, poured cold water on hopes for an immediate breakthrough.

Apart from this, stalled US stimulus talks raised doubts on whether the Republicans and Democrats can reach a consensus over the proposed a relief package. In fact, the US lawmakers approved a stopgap government funding bill on Wednesday but were unable to sort out disagreements over aid to state and local governments. This led to a turnaround in the US equity markets and triggered a sell-off in tech stocks, which drove some haven flows back towards the greenback and prompted fresh selling around the major during the second half of the trading action on Wednesday.

Meanwhile, the meeting between Johnson and von der Leyen ended with no concrete progress. A senior UK source told the media that very large gaps remain between the two sides and it is still unclear if these can be bridged. Nevertheless, the top officials agreed to delay a firm decision about the future of Brexit talks until Sunday and added to uncertainty. This was evident from the emergence of some fresh selling around the British pound on Thursday, which dragged the GBP/USD pair to the 1.3300 neighbourhood during the Asian session.

The downside remained limited, at least for the time being, as investors preferred to wait for fresh Brexit developments before positioning for the near-term trajectory. In the meantime, Thursday’s UK macro releases will be looked upon for some trading impetus. The US economic docket highlights the release of the latest consumer inflation figures and Initial Weekly Jobless Claims. Apart from this, the US stimulus headlines will influence the USD price dynamics and further assist traders to grab some meaningful opportunities.

Short-term technical outlook

From a technical perspective, nothing seems to have changed much for the pair and the two-way price moves warrant some caution before positioning for a firm near-term direction. The 1.3300-1.3290 region might continue to act as immediate support, which if broken might turn the pair vulnerable to accelerate the fall back towards weekly swing lows, around the 1.3225 area. Some follow-through selling below the 1.3200 mark will be seen as a fresh trigger for bearish traders and pave the way for an extension of the corrective slide.

On the flip side, any attempted positive move might continue to confront stiff resistance near the top boundary of a two-month-old ascending trend-channel. The mentioned barrier is currently pegged near the key 1.3500 psychological mark, which if cleared decisively will negate any near-term negative bias. Bulls might then aim to reclaim the 1.3600 mark for the first time since May 2018.

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