26.10.202023:13 Forex Analysis & Reviews: GBP/USD. Negotiation deadlock: pound falls because of the French - all hope is on Merkel

The British currency continues to fall against the US dollar, after a sharp rise last Wednesday. On that day, the GBP/USD pair jumped by almost 250 points in just a few hours, testing the 31st figure. Thus, the market reacted to the resumption of the negotiation process between London and Brussels on the fate of the trade deal. However, the euphoria did not last long: the very next day, buyers of the pair began to lose their positions: the pound was steadily declining on Thursday, Friday, and throughout the day, although it showed upward pullbacks along the way. But as soon as the pair grows, it is sold again, amid fears of another failure in the negotiations. In addition to everything - the US dollar strengthened in general, which is observed on the market today. The greenback has again become the beneficiary of the coronavirus panic amid tightening quarantine restrictions in Europe.

But in the GBP/USD pair's case, the main locomotive of the downward movement is the pound, who is still sensitive to any news concerning the prospects for Brexit. In this case, the dollar plays a secondary, but not a crucial role.

Exchange Rates 26.10.2020 analysis

In general, the downward pullback of the pound was predictable. The negotiation epic has been going on for more than one year, so we can talk about certain patterns in the behavior of the pound. So, on the eve of key events (the EU summit or the vote in the UK Parliament), the market winds itself up against the background of numerous rumors, comments and assumptions of experts. The pound depreciates during this period, as a rule, as traders succumb to panic. Then, when the worst-case scenario does not materialize, the pound jumps, sweeping away many resistance levels in its path. However, at this stage, the cycle does not end: after the euphoria, a hangover follows. The market is beginning to be skeptical about the British currency, awaiting further steps by the negotiating team.

It happened this time too. After the failed EU summit, the parties threatened to put an end to the negotiation process, pointing to a whole array of unresolved issues. Both Britain and the European Union called on to prepare for a "hard" scenario. On the one hand, the market felt that there was only a play of nerves between politicians - but none of the parties, nevertheless, took the first step. This step was taken by the European Union last Wednesday, after which London accepted it. The negotiation process has resumed. Traders reacted violently to this fact (too violently in my opinion) - the GBP/USD pair rose from 1.2940 to the multi-week high 1.3178 in just a few hours. In parallel with the official information on the resumption of negotiations, unofficial information emerged - that Brussels is ready to make concessions on the issue of fishing (this issue, let me remind you, is a key stumbling block). Perhaps this explains such a powerful growth impulse, which raised the pair by more than 250 points overnight.

At the moment, we are witnessing the next stage of the behavioral algorithm, which can be compared with a hangover syndrome. The market fears that the next round of talks will end in the same way as all the previous ones - nothing. At least for the moment, there are enough alarming signals from the fields of talks. According to The Telegraph, the negotiators again stumped after France refused to compromise on fisheries. Sources close to the talks said Emmanuel Macron refused to soften his position and took a blatant position on the issue. It is not known exactly what demands the French leader made of London. At the moment, it is only known that France categorically rejected the idea of Great Britain, whose representatives suggested adopting a similar agreement with Norway, according to which fishing quotas would be agreed annually in common fishing zones.

Take note that it is not the first time that the French have taken a rather tough stance towards the British - for example, at one time the French president was the only one among the leaders of the EU countries who opposed the prolongation of the Brexit negotiation period. The French delegation gave the go-ahead only at the last moment, after the intervention of German Chancellor Angela Merkel.

Exchange Rates 26.10.2020 analysis

This time the British also appealed to the German leader. According to The Telegraph's sources, London has turned to Merkel for help to persuade the French to soften their no-nonsense stance on fisheries. That is why the current round of negotiations was extended until Thursday - Michel Barnier remains in the British capital awaiting a "German-French verdict."

Thus, given the above disposition, it is risky to enter sell positions on GBP/USD now. In my opinion, Angela Merkel will be able to convince the French of the need to soften their position. In fact, this is the last issue (the most difficult and problematic), the resolution of which will open the way to the conclusion of a trade deal at the November EU summit. And as soon as rumors about a compromise reached on the market, the pound will more than return the lost points. Therefore, despite the three-day downward trend, long positions still remain in priority. You can enter longs from current positions or from the support level of 1.2970 (the lower border of the Kumo cloud, which coincides with the middle line of the Bollinger Bands indicator on the daily chart). Medium-term target is the upper line of the above indicator, which coincides with the level of 1.3120.

*Účelem zde zveřejněné analýzy trhu je zvýšení vašeho povědomí, nikoli dávání pokynů k obchodování.

Irina Manzenko,
Analytický expert
InstaForex Group © 2007-2021
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