- GBP/USD has been retreating after the DUP cast doubts over a Brexit deal.
- Leaders may thrash out an accord at the EU Summit.
- Thursday’s four-hour chart is showing that bulls are in control.
It is always darkest before dawn – the time that a deal seemed doomed – sending the pound lower. However, there are reasons to believe this is only a last-minute crisis before a Brexit accord is struck at the EU Summit.
UK negotiating mostly with itself
The Democratic Unionist Party (DUP) has sent the pound down as leaders in the continent were getting ready for the high-stakes summit in Brussels. The small Northern Irish party issued a statement saying there are still gaps in customs, consent, and VAT. GBP/USD dropped to 1.2748 after trading above 1.28 on Wednesday. Reports – later denied – that the DUP agreed, eventually triggered a rally to a peak of 1.2877.
Media reports suggest that the DUP has broadly accepted having a customs border in the Irish Sea – having a de-facto separate regime for Northern Ireland. However, the main issue is consent – agreeing on a mechanism for changing current arrangements that would not bypass the unionists.
The DUP is critical to passing a Brexit deal in parliament. Prime Minister Boris Johnson needs their ten MPS to support the agreement and their influence to convince hardliners from his Conservative Party to go along as well. The PM has been meeting DUP leader Arlene Foster and her colleagues several times in recent days to convince them to back the accord.
Boris to Brussels
As Johnson flies to Brussels, he still needs to seal the final details with the EU. The Brexit deal has not been finalized – due to the final green light from the UK – but also due to outstanding issues. Negotiators have been working almost around the clock to cross the t’s and dot i’s on Value Added Tax (VAT) arrangement, which remains unresolved.
EU diplomats have expressed frustration at the lack of a legal text they had been promised before the summit. Moreover, some sources in Brussels stated that they would not negotiate Brexit with the PM at the summit. Nevertheless, past encounters often led to top-level talks into the night.
Some officials are considering another summit toward the end of October, in case both sides conclude that another short period of talks is needed.
Back in Westminster, lawmakers are set to approve a motion to hold a special session on Saturday. The government aims to pass the Brexit deal on this occasion, but the opposition may have different plans. The Labour Party may add an amendment to the agreement that would condition its approval on a “confirmatory vote” – a second referendum. The option currently seems remote, and any political move in London depends on reaching a deal with Brussels and with Belfast first.
Overall, Brexit is left, right, and center – every headline from the UK government, the EU, and the DUP may move the pound substantially.
Top-tier UK economic data have been mixed. Retail Sales met expectations and remained flat in September, while core sales beat projections with an increase if 0.2%. Wednesday’s inflation report for September marginally missed with 1.7% YoY.
The US Dollar has been under pressure after its consumption figures fell short of expectations. Retail Sales disappointed with a drop of 0.1% last month, while the all-important control group was flat. A big bulk of US data is due out today, including Building Permits, Housing Starts, and Industrial Production.
The odds of the Federal Reserve cutting rates have risen after Wednesday’s weak data. Several Fed officials will be speaking today, most notably John Williams, President of the New York branch of the Federal Reserve.
GBP/USD Technical Analysis
GBP/USD has been trading alongside uptrend support that has been touched three times in recent days – making it significant. Moreover, the last drop pushed the Relative Strength Index below 70 – out of overbought conditions. The currency pair trades well above the 50, 100, and 200 Simple Moving Averages.
All in all, bulls have the upper hand.
Resistance awaits at 1.2860, which was a resistance line back in May. The fresh high of 1.2877 is next. 1.2920, 1.2990, and 1.3050 are the next lines to watch, and they all date back to the spring.
Looking down, some support awaits at 1.28, which capped GBP/USD earlier this week. 1.2750 is the daily low, 1.2706 capped it last week, and 1.2660 was another swing low earlier this week.
It is critical to remember that volatility is set to be extremely high amid fast-moving Brexit headlines.
Equities Contributor: FXStreet
Source: Equities News