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GBP/USD: Troubles In The Brexit Tunnel

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  • GBP/USD has been losing ground as no Brexit breakthrough has been reached.
  • Ongoing talks in Brussels and comments from politicians are set to dominate trading. 
  • Monday’s four-hour chart is showing that GBP/USD is outside overbought conditions, allowing for further gains.

There may be light at the end of the tunnel – but that tunnel is long. Intense EU-UK Brexit negotiations over the weekend – dubbed by some as “tunnel negotiations” have failed to yield the big breakthrough that seemed imminent last week. GBP/USD has fallen below 1.26 after extending its massive rally and topping 1.27 on Friday. It remains considerably above the 1.22 handle that characterized its trading before Prime Minister Boris Johnson made concessions.

While the UK has agreed to refrain from a customs border on Ireland, Johnson’s plan includes keeping Northern Ireland (NI) within both the EU’s customs union and the UK’s one, depending on the destination of goods and using a rebate system to regulate flows. However, Chief EU Negotiator Michel Barnier cast doubt about a system he called “untried” and that included too many “ifs and buts”.

Barnier also said that a “political impulse” is needed, which seems to hint that further concessions from the British PM may be needed. The UK delegation led by David Frost may have a limited mandate, according to some European officials.

Watch Brussels, but also London

Both sides have agreed that there is significant work to do and talks are continuing as the clock ticks down to the EU Council Summit on Thursday and Friday. Leaders are still hoping to announce a deal at the event, but some are already suggesting that a Brexit extension may be needed – at least a short a “technical extension” – to complete talks and ratify the accord.

Johnson continues enjoying the support of most members of the European Research Group (ERG) – the Brexit hardliners. However, the Northern Irish Democratic Unionist Party (DUP) has cast doubts about Johnson’s proposals. Nigel Dodds, the DUP’s deputy leader, insisted that NI must stay in the UK’s customs union. 

MPs return to parliament after a short break. The Queen will read out her speech, detailing the government’s priorities. A usually festive day at the House of Commons will likely be overshadowed by developments in Brussels. Nevertheless, comments from MPs may also rock the pound. 

Elsewhere, the US and China reached “Phase I” of a trade deal which aims to reduce tensions. The immediate threat of more tariffs has been removed but the world’s largest economies have many issues to thrash out. The market mood has improved, but gains reached their limits. The US and Canada are on holiday today, and this means lower market liquidity. 

Overall, Brexit headlines are set to dominate trading. 

GBP/USD Technical Analysis

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The Relative Strength Index on the four-hour chart has dropped below 70 – thus exiting overbought conditions – and allowing for more gains. Upside momentum remains substantial and the pair remains above the 50, 100, and 200 Simple Moving Averages. All in all, the picture remains bullish.

Support awaits at 1.2525, which capped GBP/USD in mid-September. It is followed by 1.2470, which temporarily capped the pair on its way up. 1.2415 separated ranges in late September and early October. It is followed by 1.2390 and 1.2345.

Resistance awaits at 1.2580, which was the peak in mid-September. Next, we find 1.2640, which played a role in the spring. The fresh high of 1.2706 is the next level to watch. 

Image Sourced from Pixabay

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