GBP : No Deal Brexit

(Mon, 7 Dec 2020). The increasing likelihood of a no-deal Brexit outcome could drastically undermine the politically-sensitive British Pound in the coming days, as negotiators from both sides scramble to get a deal across the line before the EU summit on December 10.

Talks fell apart late last week after UK chief negotiator David Frost and his European counterpart Michel Barnier released a joint statement, citing “significant divergences on level playing field, governance and fisheries” as major factors preventing an agreement from being met.

These three issues have been a consistent stumbling block for negotiations and it seems relatively unlikely that, at this stage of the game, either side will compromise.

After all, French European Affairs Minister Clement Beaune has warned that “if there was an agreement and it was not good, we would oppose it with a right of veto”, adding that “I still hope that we can have an agreement, but we will not accept a bad deal for France”.

Moreover, French President Emmanuel Macron has reportedly lobbied the EU to push negotiations past the year-end deadline to pressure the UK to concede ground on several key issues.

That in mind, it appears that the prospect of Britain tumbling out of the EU without a ratified free-trade agreement is becoming more likely by the day, with Irish Prime Minister Micheal Martin stating that “things are on a knife edge here and it is serious”.

Therefore, the British Pound could be at risk of significant losses in the near term, if the call between British Prime Minister Boris Johnson and European Commission President Ursula von der Leyen later today fails to show any signs of meaningful progress towards a deal.

GBP/USD DAILY CHART – SHOOTING STAR HINTS AT REVERSAL

From a technical perspective, GBP/USD rates could be poised to reverse lower as price forms a bearish Shooting Star reversal candle just below key resistance at the 2019 high (1.3515). Significant bearish RSI divergence, in tandem with a bearish MACD crossover, suggests that the path of least resistance is skewed to the downside.

Breaking back below the 88.6% Fibonacci (1.3391) could ignite a pullback towards the 1.3300 mark, with a break below bringing the March high (1.3200) into focus. Alternatively, gaining a firm foothold above 1.3500 on a daily close basis would probably neutralize near-term selling pressure and carve a path for price to probe the May 2018 high (1.3665).

GBP/USD 4-HOUR CHART – 21-MA CAPPING UPSIDE POTENTIAL

Zooming into a four-hour chart also hints at further downside as prices fail to remain constructively perched above range support at 1.3466 – 1.3480 and slip back below the Pitchfork median line. GBP/USD looks set to slide back towards the 100-MA and 78.6% Fibonacci (1.3310) in the near term, if support at the 88.6% Fibonacci (1.3391) gives way.

Clearing the psychological pivotal 1.3300 mark could trigger a more extended correction and open the door for sellers to challenge the sentiment-defining 200-MA (1.3227) and March high (1.3200). Conversely, pushing back above the 21-MA and Pitchfork median line could inspire a retest of the monthly high (1.3539).

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