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GBP reverses course after Brexit deal falls short

Early on Monday, the British pound surged after reports surfaced that an initial Brexit deal between the UK and EU was close to being reached. The reports proved to be premature, however, as UK Prime Minister Theresa May and European Commission President Jean-Claude Juncker later announced that an agreement had not, in fact, been settled upon. Juncker stated that some issues still needed to be ironed out, and May said that further talks would take place later in the week. The pound quickly pared its earlier gains and reversed course after this confirmation that no deal had been reached yet. The losses may be limited for the time being, however, as both May and Juncker were optimistic that an impending agreement was still likely.

Monday’s initial report on the high likelihood of a Brexit agreement, and the resulting surge for sterling, boosted GBP/JPY up to approach major resistance just shy of the key 153.00 level, establishing a new 17-month high in the process. The surge also established a potential double-top pattern with the late September highs. The subsequent sterling fall after the May/Juncker announcement prompted a GBP/JPY pullback from that resistance.

Along with the progress of Brexit talks, this week also features some key UK data, including services PMI and manufacturing production, that could impact the pound significantly. As for Brexit, any continued failure to reach a deal through this week and beyond is likely to weigh further on sterling, potentially keeping GBP/JPY below the key 153.00 level, in which case the key downside target remains around 148.00 support. If a satisfactory deal is reached soon, however, the key upside level to watch for a sustained breakout continues to be at the noted 153.00 resistance level.

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