Analysis | October 6, 2020

KTM FX Weekly: Expect nothing until the last possible moment

The pound is holding gains against the pound and dollar since mid-September. EURUSD has been one at crossroads on the back of deal optimism. The final round of UK-EU talks begun last week ahead of October 15 EU leaders’ summit. We don’t expect an outcome this week and have to wait until the last minute.

  • At UBS, Paul Donovan said, “This never ends.” In a daily report, he said, “The interminably tedious EU-UK divorce continues, with more noise over the weekend and the fascinating prospect of talks about fish this week. The message is still the same—expect nothing until the last possible moment (suggesting another month at least), and then expect years of negotiations after that. This never ends”.
  • Ray Attrill at NAB also said, “Optimism that a UK-EU trade deal can be struck in time has not been dented by the failure at the weekend to agree that talks are now at a stage where they can enter the so-called tunnel. This is despite UK PM Johnson at the weekend saying that the UK can “more than live with” a no-deal Brexit, and too comments from BoE MPC member Haskell that he stood ready to provide more stimulus if needed, and his positive spin on negative rates, as a possible future policy tool.”

On Saturday, the President of the European Commission, Ursula von der Leyen, and the UK Prime Minister, Boris Johnson, spoke about the state of play in the negotiations on the future relationship between the UK and the EU. They agreed on the importance of finding an agreement, if at all possible, as a strong basis for a strategic EU-UK relationship in the future.

What’s next? The pound traders focus on the meeting between EC Commission President Ursula Von Der Leyen and Boris Johnson this Saturday. This event could raise the GBP volatility, but we remain neutral on EURGBP’s trend.

Data review: UK GDP was revised slightly higher, and Manufacturing recovery continues in September. On top of these, the expansion of the UK service sector remains marked in September. 

  • UK gross domestic product (GDP) is estimated to have contracted by 19.8% in Quarter 2 (Apr to June) 2020, revised from the initial estimate of a 20.4% fall. According to ONS, this is the largest quarterly contraction in the UK economy since quarterly records began in 1955 and marked the second consecutive quarterly decline after a fall of a revised 2.5% in the previous quarter.
  • UK manufacturing PMI fell slightly to 54.1 in September, down from August’s two-and-a-half-year high of 55.2, according to HIS Markit.

Commenting on the data Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, said, “Manufacturing made solid progress towards recovery in September, with just a minor step back from August’s two-and-a-half-year index high.”

  • UK Service sector fell from August’s 58.8, which was the strongest reading since April 2015, to a level of 56.1 in September, according to IHS Markit. Although the lowest reading since June, the index nonetheless pointed to a marked rate of growth.

 Data preview: On the data front, we will see August GDP and Industrial Production on Friday. 

TECHNICAL OVERVIEW

The lower lows and lower highs pattern on the four-hour chart are still intact. Watch out for resistance at 0.9175 and 0.9220 if the price is moving higher. Flipside, 0.9000, is pivotal. Below here, support exists at 0.8960 and .08860.

The pound traders focus on the meeting between EC Commission President Ursula Von Der Leyen and Boris Johnson this Saturday. Until such time we remain neutral.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

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