Rising Brexit Risks for British Pound as the UK and EU failing to reach trade deal

Sterling could depreciate further against the euro as the risk of the U.K. and EU failing to reach a trade deal by the year-end deadline rises, MUFG Bank says. “It is difficult to pinpoint when those risks could suddenly start to escalate to a degree to undermine the pound but we look to be at a point when this issue is playing a role in GBP performance now,” MUFG’s Derek Halpenny says. The market seems convinced a deal will be reached but that’s “set to be questioned more seriously over the coming weeks.” EUR/GBP rises 0.9% to a two-day high of 0.9139, according to FactSet, after The Telegraph reported the U.K. government expects no EU trade deal by year-end. GBP/USD falls 0.3% to 1.2690.

Sterling could rise if the U.K. secures a barebones trade deal for goods with the EU by the end of the year, potentially taking it to $1.35, from its current level of $1.2647, Capital Economics says. “The latest rebound in investors’ net futures positions suggests that the market hasn’t completely written off a deal being done,” Capital Economists economist Paul Dales says. “We still expect there to be a slim trade deal that prevents a major step change in the U.K.- EU trading relationship at the end of the year.” Volatility in sterling is unlikely to ease further this year as the currency reacts to the “ebb and flow” of Brexit negotiations, he says.

Uncertainty over the U.K.-EU trade deal negotiations is likely to push sterling lower against the euro this summer, says ING, which expects EUR/GBP to rise to 0.92. EUR/GBP is last up 0.6% at 0.9113–having earlier reached a two-day high of 0.9139, according to FactSet–after the Telegraph reported that U.K. government ministers believe the U.K. and the EU will fail to agree a trade deal and that the working assumption is that the U.K. will trade on WTO terms after Dec. 31 when the Brexit transition period ends. This leaves sterling as “the laggard,” ING analyst say.

👉 The euro is unlikely to remain above $1.15 because there are too many investors betting on the currency rising, Societe Generale says. “I’ll guess it doesn’t hold and we consolidate, because the market is getting too long of the euro,” SocGen’s Kit Juckes says. However, if the euro does stay above $1.15 by the end of August, it will probably reach $1.20 by year-end, he says.

👉 The euro is starting to emerge as a safe haven currency, Oanda says. “With the coronavirus under control, monetary and fiscal stimulus in place, and a better short-term outlook, investors are starting to gravitate to the euro,” Oanda analyst Edward Moya says. EU leaders on Tuesday agreed a coronavirus recovery fund, while the European Central Bank last month expanded its pandemic bond-buying program to revive the economy. EUR/USD rises 0.3% to 1.1569, having earlier hit its highest level since October 2018 at 1.1585, according to FactSet.

👉 Meanwhile, investors seemed to look past escalating tensions between the U.S. and China. The U.S. government demanded that China shut down its consulate in Houston, Texas, within 72 hours amid accusations of spying. Retaliatory measures from Beijing are widely expected.

👉 Spot gold price surged a further $29.00 (+1.6%) to $1,871 an ounce, and spot silver soared 8.0% to $23.00 an ounce. ICE U.S. Dollar Index slipped 0.2% on day to 94.95, down for a fourth straight session.

👉 TU.S. WTI crude oil futures (August) were little changed at $41.90 a barrel. The U.S. Energy Information Administration reported that crude-oil stockpiles increased 4.90 million barrels last week, contrary to a reduction of 1.95 million barrels expected.

Here are the High Impact Economic events expected today:

As we have observed earlier in the Currency Monitoring Chart, we discovered that GBP/NZD lines are separated with the farthest distance.

The following is USD/JPY looking at 4 hour chart:

INTRADAY MARKET INSIGHTS

USD/JPY Intraday: 
Bullish bias above 107.05. The pair is off an intraday high of 107.29 seen overnight, but remains at levels above the key support at 107.05. Currently the pair is trading at levels around the ascending 20-period moving average, which stands above the 50-period one. A return to the overhead resistance at 107.30 (around the high of yesterday) would trigger a further advance toward 107.40 on the upside. Alternatively, a break below 107.05 would open a path toward 106.90 on the downside.

EUR/USD Intraday:
Key resistance at 1.1580. The pair stays on the downside after retreating from an intraday high of 1.1601 seen yesterday. Currently the pair remains capped by the descending 20-period moving average. Unless the key resistance at 1.1580 is surpassed, the pair stands higher chances of returning to 1.1545 and 1.1530 on the downside. Alternatively, a break above 1.1580 would call for a further advance toward 1.1600 on the upside.

AUD/USD Intraday:
Key resistance at 0.7155. The pair retreated from 0.7180 with the bearish divergence signal from the relative strength index. Besides, the 20-period moving average is also turning downward. Hence, as long as the resistance level at 0.7155 is not surpassed, look for a return with targets at 0.7125 and 0.7110 in extension. Alternatively, a break above 0.7155 would bring a rebound with 0.7180 and 0.7200 as targets.

NZD/USD intraday: 
Under pressure below 0.6681. The pair retreated and struck to the lower Bollinger band. The pair breaks below the 20-period moving average and tests the 50-period one. The relative strength index advocates for a further downside. In this case, unless the resistance level at 0.6681 is violated, the pair should reach 0.6622 and 0.6607 on the downside. Alternatively, a break above 0.6681 would turn the outlook to positive and bring a rise to 0.6707 as a target.

GBP/USD Intraday: 
Under pressure. Although the pair posted a rebound, it is still under pressures below the key resistance level at 1.2745. The relative strength index is around its neutrality level at 50, suggesting the lack of upward momentum for the prices. To conclude, as long as 1.2745 acts as the support level, expect a return with targets at 1.2715 and 1.2690 in extension. In an alternative scenario, breaking above 1.2745 would bring a new up leg with 1.2770 and 1.2800 as targets.

USD/CHF Intraday: 
0.9280 expected. The pair remains under pressure below the resistance level at 0.9315 and the declining 50-period moving average. The relative strength index is locating at the selling zone between 30 and 50, indicating a bearish outlook. To conclude, as long as 0.9315 holds on the upside, a further decline to 0.9280 and even to 0.9265 seems more likely to occur. On the other hand, crossing above 0.9315 would trigger a technical rebound with 0.9330 and 0.9350 as targets.

USD/CAD Intraday: 
Towards 1.3375. The pair remains on the downside as it has formed a lower-high. In fact, it is capped by the 20-period moving average, which stays below the 50-period one. The relative strength index remains subdued in the 40s, suggesting a bearish bias. As long as the key resistance at 1.3435 holds, the pair should target 1.3395 and 1.3375 on the downside. Alternatively, above 1.3435, expect a revisit to 1.3455 on the upside.

EUR/JPY Intraday: 
Upside prevails. The pair has accelerated to the upside after breaking above its previous high. Currently, the 20-period moving average has moved further above the 50-period one, and the relative strength index stays above the neutrality level of 50, signaling a bullish bias. Above the key support at 123.67, expect an advance to 124.45 and 124.66. Alternatively, a break below 123.67 would trigger a pull-back to 123.32.

EUR/GBP Intraday: 
Target 0.9034. The pair has potentially formed a double-top pattern. In fact, it has broken below the 20-period moving average, which has turned downward. The relative strength index has dropped to the 40s, indicating a bearish bias. Unless the key resistance at 0.9108 is surpassed, the pair should proceed to 0.9049 and 0.9034 on the downside. Alternatively, above 0.9106, expect a rebound to 0.9134.