Pound Rebound approaches 1.35 on Brexit-Talks Offer (With Trading Strategy)

The British pound slumped the most since March on concerns about a new strain of coronavirus in the U.K., then pared much of the decline as Prime Minister Boris Johnson made another offer to salvage Brexit talks.

Sterling fell as much as 2.5% to $1.3190 as countries from Europe to Asia sealed off travel links with Britain to try and contain the highly-infectious mutation.

The pound, helped by a Bloomberg report which said the European Union was considering a compromise on fishing rights - a stumbling block to a trade deal - recovered to trade at $1.3418 in Asia, though it remained on edge as talks progress.

At 11:50(GMT+8), the sterling fell 0.37% to 1.34123.

Investors were spooked earlier as another Brexit deadline went past without results and Britain’s biggest port in Dover stopped all traffic heading to the continent, threatening the U.K.’s supply chains with Europe. The currency’s one-week implied volatility was the highest for a Christmas period in more than a decade.

The U.K. Confronts Threat of Food Crisis as Virus Surge Blocks Trade

U.K. currency plummets on Brexit anxiety, renewed virus fears.

“All of this is unwelcome news, at a time where there was already plenty to be concerned about,” said James Athey, a money manager at Aberdeen Standard. “Markets are, in general, overly complacent about the risks out there. The pound is no exception.”

The risk that Britain could drop out of the European Union at year-end without a trade agreement has been compounded by the prospect of immediate delays to food supplies after a new strain of Covid-19 was discovered in Britain. Prime Minister Johnson detailed new restrictions for London and the southeast, while several countries suspended inbound travel from the U.K.

“Once you layer Brexit on to this chaos, and now the closure of Dover, I can’t see how we can avoid some disruption in the supply of perishables,” said Jane Foley, head of foreign exchange strategy at Rabobank, adding that a no-deal scenario could see the euro rise to 95 pence or higher. “The pound will remain sensitive to Brexit-related news in the days ahead.”

The moves mark a turnaround after sterling rose last week to its highest in nearly five months, on a weaker dollar and speculation that a deal might be reached on Sunday, a deadline set by the European Parliament.

In his latest offer late Monday, Johnson argued the EU should reduce the value of the fish it catches in U.K. waters by about a third, after insisting last week that the EU accept a 60% cut. Johnson had said earlier in the day that leaving the EU without a free-trade agreement would be “entirely satisfactory.”

The euro recovered to sit at $1.2229 on Tuesday after falling a cent to $1.2130. The yen was steady at 103.30 per dollar and the Australian and New Zealand dollars a little soft with the nervous mood, but well above overnight lows.

“The euro found an abundance of buyers on the deep dip,” said Stephen Innes, Bangkok-based chief strategist at currency broker Axi.

“The ‘short dollar’ clear-out is probably nothing more nefarious than stretched positioning getting taken out to the woodshed on Brexit scares. However, it shows the potential dangers of universally bearish dollar sentiment,” he said.

Experts said there was no evidence that vaccines would not protect against the new virus variant, but Britain’s chief scientific adviser said that in the meantime, tighter restrictions on public life in Britain were likely.

Investors are looking ahead to confidence data in the U.S. and Germany later on Tuesday and have been cheered by the expectation that stimulus checks could go out to Americans next week.

Analysts remain bullish

Still, analysts said on Monday that they remain bullish on the pound going into 2021 despite headwinds the currency faces.

“We should expect some volatility for the pound and what we’re seeing this morning is reflective of that,” Rodrigo Catril, senior currency strategist at National Australia Bank (NAB), said.

A Brexit trade deal before the end of the year is “still more likely than not,” Catril said, adding that “it makes sense and politically it will be difficult to argue that the deal has broken down … because of (fisheries)” due to the industry’s relatively small magnitude in the overall economic deal being discussed.

Macquarie Group’s Gareth Berry also told CNBC’s “Street Signs Asia” on Monday that he was “hoping for a positive resolution” on Brexit talks by the end of this week.

“That should lead to a deal that all sides can live with and that can ultimately be ratified the following week in time for that Dec. 31 deadline,” said Berry, who is managing director and foreign exchange and rates strategist at Macquarie. “Sterling should love that, and that’s one reason why we’re quite bullish ... on sterling for the next few months.”

As for the virus, NAB’s Catril said its near-term economic impact is “significant,” though expectations of stimulus and vaccine rollouts over the coming months are encouraging markets to “see the positive side over the medium term.”

Trading Strategy (source: Trading Central)

Pivot: 1.3370

Our preference: long positions above 1.3370 with targets at 1.3500 & 1.3550 in extension.

Alternative scenario: below 1.3370 look for further downside with 1.3330 & 1.3290 as targets.

Comment: even though a continuation of the consolidation cannot be ruled out, its extent should be limited.

Supports and resistances:

1.3600

1.3550

1.3500

1.3423 Last

1.3370

1.3330

1.3290

Guideline for Trading Central strategy 

Trend chart reading guideline

1. First look at the time period in the upper left corner of the chart: ·30MIN and 1H chart shows the trading suggestions for intraday ·Daily chart shows the market trend analysis in next 2-3 days

2. The blue horizontal line on the chart marks the pivot: pivot indicates the reversal of the market. When the price is above the pivot, it indicates an upward trend, when the price is below the pivot , it indicates a downward trend. When the price breaks through the pivot, the trend is reversed.

3. The red and blue thin curves in the Candlestick chart chart are technical indicators: Red line is MA20+Bollinger bands, Blue line is MA50. under the Candlestick chart chart are also the technical indicators: Blue line is RSI, Red line is 9MA;

4. The green horizontal line is the resistance level for a price increase, and is also the profit target for long orders; the red horizontal line is the support level for a price decrease, and is also the profit target for short orders.

How to use TC strategy？

1.[Pivot] is the reversal line of the market trend. When the price up the pivot line which means in Bullish, you can open a long position or Buy. on the contrary, when the price under pivot line which means in bearish. You ‘d better make short positions or Sell. 

2. [our preference] is the main trading suggestion for your reference. You can exit your trading refer to this target or close positions before it.

3. [Alternative scenario] is the plan B for your reference. 

4. [Comment] is the technical analysis of market trends and technical support for trading strategies. 

5. [Supports and resistance] Supports are levels where the price tend to find support as it falls.

Resistances are levels where the price tend to find resistance as it rises. So, exit before the trend reverse.