GBP/USD Reverses Lower on Diminishing Trade Deal Prospects

Sterling has come under pressure and is the weakest major currency in early trading on Wednesday. The British pound is weighed by concerns that the UK will not be able to reach a trade deal with the EU.

The Telegraph reported that the UK government is working on the assumption that trade with Europe will be conducted on World Trade Organisation terms.

WTO terms are essentially default terms when an agreement cannot be reached.

The current round of trade talks will end on Thursday and there is little expectation for progress with disagreements on various issues.

The UK has until December 31 to reach an agreement with the EU before the default WTO terms kick in.

Tensions between the US and China have been rising with China threatening to retaliate after the US ordered it to close a Chinese consulate in Houston over security concerns.

The equity markets have eased back as a result, weighing on the GBP/USD exchange rate which has had a strong correlation with equities as of late.

New coronavirus cases in the US appear to be slowing. The CDC reported a peak of nearly 75 thousand cases on Friday. New cases have declined since then to fall below the 7-Day average.

Technical Analysis

GBP/USD turned lower at 1.2750 resistance which had served to cap the exchange rate back in June. However, the pair took out some major technical areas in the past week.

On Monday, GBP/USD rallied above 1.2643 to break out of a range. On Tuesday, the pair cleared above its 200-day moving average.

Today’s daily close will provide an indication of whether the early week momentum had any substance behind it. A close near current levels would result in a bearish candlestick formation on a daily chart that could accompany a stronger pullback.

The level to watch is 1.2697 as it marks the 200-day moving average.

Bottom Line

• Trade talks with the EU are not going well which have weighed on GBP/USD.
• Equity markets have eased back on US-China tensions which has impacted GBP/USD by correlation.

For a look at all of today’s economic events, check out our economic calendar.