For the fifth day in a row, the GBP/USD is moving in an upward correction, taking advantage of the dollar's decline and some cautious optimism in the markets over the resumption of Brexit talks. The pair settled around the 1.3249 resistance, the highest level in eight months. Investor sentiment towards the sterling has turned increasingly positive in recent weeks, and the CFTC data for the week ending August 11th showed a sharp reduction in GBP short positions, with net positions on the pound moving into a neutral territory for the first time since April. The data showed that the number of active bets in favor of a weak sterling has been reduced from 34% to 28%.
At the same time, a move to neutral territory indicates that there may be some excessive market laxity towards Brexit risks and requires some caution over the pound's future rallies.
ING Bank continues to see risks that cannot be neglected to re-increase the selling of sterling in the near future, with negotiations between the United Kingdom and the European Union being at the center stage of the British currency engines, increasing uncertainty about the outcome, which leads some investors to speculate that no deal will be reached. EU and UK negotiators on Brexit will meet in Brussels to try to reach an agreement on the remaining issues hindering a post-Brexit trade agreement. Barriers include EU access to UK fishing waters and the extent to which EU rules are applied to the British industry in order to ensure that the UK does not gain what the EU considers an unfair advantage.
Commenting on this, Reese Herbert, chief economist at Lloyd’s Banking Group, said: “The final official round of negotiations on the future relationship between the UK and the European Union is set to begin. The discussions are scheduled to cover some major issues as the two sides are said to be still somewhat apart. These rules include competition, fisheries policy, and state aid”.
The failure of the current round of negotiations will be a valid reason for the eventual heavy sell-off in the British pound as the market races to prepare for a "no-deal" outcome from the trade negotiations. This view is contrasted with other briefings that indicate that there is a breakthrough opportunity looming for negotiators and that eventually some form of agreement will be reached by the fall. “The headlines on both sides are still disappointing,” says Shreyas Gopal, Deutsche Bank strategist. “There are still significant differences, particularly regarding the UK’s post-Brexit approach to aid the country. However, there has been some progress beneath the surface in the structure and governance of the deal. Overall, we still see the deal as more likely than it was in the fall, although the market may first become more nervous about the possibility of a no-deal exit as the noise builds in the coming weeks. ”
The Brexit negotiations are likely to become a bigger driver for the British pound as we approach the tentative deadline of October. Therefore, we recommend those with international payments in sterling to consider securing the current exchange rates or to consider automatically reserving the rates when activated in the future.
According to the technical analysis of the pair: The general GBP/USD trend and according to the performance on the daily chart, is still bullish, and breaking the 1.3200 resistance confirms the strength and control of the bulls and the extent to which the dollar weakens. Gains around the resistance levels 1.3265 and 1.3320 will push technical indicators to strong oversold areas. In addition, with the announcement of a failure in the Brexit negotiations, we may witness strong profit taking sell offs and the opportunity will be better for the bears to move towards the 1.3000 support again. I still prefer to sell the pair from every upper level.
As for today's economic calendar data: From Britain, the consumer price index, producer price index and retail price index will be announced, all of which are tools to measure inflation in the country. During the American session, the MoM of the last US Central Bank meeting will be announced.