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Jignesh Davda

Sterling Jumps on Hopes of a Possible Deal

Investor sentiment towards Brexit reversed sharply on Thursday after news that the UK is progressing towards a deal.

Prime Minister Boris Johnson seems to have finally gotten a win after being dealt a series of defeats. Johnson managed to reach a comprise with Irish Prime Minister Leo Varadkar that aims to get past the impasse regarding the Irish backstop.

The so-called backstop has been the main obstacle in reaching a deal. In a joint statement, Johnson and Varadkar announced that they could see a “pathway to a potential deal”, signaling that they have found a way around the issue.

Negotiators met for breakfast earlier today to discuss the revised proposal and things can potentially move fast from this point. GBP/USD is likely to remain volatile over the near-term as investors gain clarity on how Brexit will potentially unfold.


Technical Analysis

Investors have considered the potential of a no-deal Brexit long before Johnson was elected and have been pricing it in the potential of such a scenario. For that reason, the British pound stands to recover higher on further confirmation that the UK will leave the EU in an orderly fashion by the October 31 deadline.

GBPUSD 4-Hour Chart

We could see GBP/USD pare some gains in the absence of further developments although the pair has made a significant technical break. Specifically, the exchange rate has scaled above the 20-week and 100-day moving averages. These moving averages had held the pair lower in September to trigger a roughly 3% correction.

Further, the correction from September highs took the form of a bullish flag and yesterday’s bullish break also signals more upside.

The next level of interest to the upside falls at 1.2575. This level acted as both support and resistance during the summer. Beyond that, I think this rally could even extend further towards the 1.2700 area.

Bottom Line

  • Sterling is rallying as the markets see the odds of a no-deal Brexit declining significantly.
  • Upward momentum is strong and a catalyst is in place for a move to resistance at 1.2575. Beyond that, I see potentially for the rally to extend to 1.2700.
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