GBP/USD: EU Concession on Backstop Has Devils in the Details

• GBP/USD has fallen sharply as Brexit talks are on the verge of collapse.
• Investors will focus on ongoing talks and the US Fed’s minutes.
• Wednesday’s four-hour chart is pointing to further falls for the currency pair.

Optimists may say it is always darkest before dawn when referring to the acrimony around Brexit talks. It may get darker still, however, as the pound is far from pricing the optimistic scenario.

The Times reported that the EU is ready to offer the UK a major concession — allowing a time-limit on the Irish backstop — news that sent the pound rallying.

Diplomatic sources say, however, that the bloc will condition this unilateral revocation of the withdrawal treaty on both communities in Northern Ireland agreeing to it. The offer takes away the veto that Prime Minister Boris Johnson was willing to give the Democratic Unionist Party (DUP) under his plan. The party is unlikely to support the move. Moreover, hardline Brexiteers in Johnson’s Conservative Party oppose any Irish backstop, even if it can be ditched in 2025.

GBP/USD, which nearly reached 1.23 on the news, could head back down and return to its gloom.

The gloom originates from an unfruitful telephone conversation between the PM and German Chancellor Angela Merkel on Tuesday that may have closed the door on reaching a Brexit deal by the EU Summit on October 17. A source at 10 Downing Street said that Merkel demanded the UK accept keeping Northern Ireland in the EU’s customs union and that Johnson reached the conclusion that a deal is impossible at this juncture.

While Berlin officially preferred to refrain from providing details of the call, EU officials dismissed the British account. Moreover, European Council President Donald Tusk blamed the UK for playing a “stupid blame game.” Regardless of the exact detail, politicians, journalists and investors have become skeptical about reaching an accord next week, sending the pound down.

Later on Tuesday, the UK PM spoke with his Irish counterpart Leo Varadkar, who is seen in London as the roadblock to reaching an accord. The long 40-minute call ended with a decision to hold a face-to-face meeting on Thursday and on Friday, leaving some hope for a breakthrough.

The heart of the disagreement is the question of customs in Ireland. The UK wants to be able to strike its own trade deals while keeping an open border in Ireland, breaching the EU’s Single Market. A recent poll has shown that 70% of Germans prefer maintaining the integrity of the single market even if this means a loss of 100,000 German jobs — the estimated damage in the event of a no-deal Brexit.

Beyond Brexit

US-China trade relations have worsened after the US announced visa limitations to several Chinese officials involved in human rights violations in the western province of Xinjiang. They join the blacklisting of some 28 Chinese firms, and Beijing vowed to retaliate. While Washington claims the moves are unrelated to the trade spat, they have weighed on market sentiment ahead of high-level talks due on Thursday.

Jerome Powell, Chair of the Federal Reserve, remains optimistic about the US economy but has left the door open to cutting rates further in a speech on Tuesday. He will speak again today ahead of the release of the Fed’s meeting minutes. The document will likely shed light on the split within the ranks of the world’s most powerful central bank.

Overall, Brexit headlines are set to dominate, with an occasional impact from US events.

GBP/USD Technical Analysis

GBP/USD is trading below the 50, 100, and 200 Simple Moving Average (SMAs) and suffers from downside momentum. The recent rise helped the Relative Strength Index (RSI) escape from 30 – avoiding oversold conditions.

Support awaits at 1.2235, which was a swing low in early September. Next, we find 1.22, the lowest levels since early September reached on Tuesday. It is followed by the mid-August low of 1.2155.

Resistance awaits at 1.2275, which supported GBP/USD in late September. Next, 1.2345 capped GBP/USD in early October, and 1.2390 separated ranges in the past few weeks.

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Equities Contributor: FXStreet

Source: Equities News