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Jignesh Davda

Merkel – Brexit Deal “Overwhelmingly Unlikely”

German Chancellor Merkel does not see a deal materializing unless British PM Johnson makes significant revisions in his latest Brexit plan.

Once again, the main issue is the Irish backstop as Merkel insists that Northern Ireland remains a part of the customs union.

Irish Prime Minister Leo Varadkar echoed Merkel’s words saying that it will be difficult to establish a deal by next week.

Sterling fell against all of its major counterparts yesterday as investors saw these latest developments as lowering the chance of a deal being struck for an orderly Brexit. At the same time, there have been talks of the UK government making preparations for an exit without a deal, reigniting fears of a no-deal Brexit.

GBP/USD recovered in early trading today, however, this appears to be more related to the dollar rather than Sterling strength.

Brexit uncertainties will tend to keep the British pound under pressure. Unless of course, there is progress towards a deal. The clock is ticking down as a deal should be made before the EU summit which takes place late next week. A recently passed law dictates that Johnson requests an extension if a deal is not made by then.


Technical Analysis

Perhaps the only certainty amidst Brexit talks is that volatility is likely to rise in the Sterling cross rates.

We already got a taste of this yesterday when the British pound fell broadly against all its major counterparts.

GBPUSD 4-Hour Chart

An early day recovery in the pair today came as a result of some dollar weakness. However, there has not been a clear indication that the dollar is turning at this point.

GBP/USD made a decisive break below a horizontal level at 1.2287 yesterday. So far, this level has capped the early day recovery.

A break of it could lead to further gains into the next area of resistance at 1.2327. While below 1.2287, the pair appears poised to test support at 1.2178.

Bottom Line

  • GBP/USD has recovered on the back of some dollar weakness. However, ongoing Brexit uncertainty will tend to keep selling pressure on Sterling.
  • The current sentiment is that a deal is won’t be reached to leave by the October 31 deadline. This can obviously change quickly and GBP/USD will be sensitive to ongoing developments.
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