Currency Pair of the Week: EUR/GBP

With the Brexit deadline approaching, there is the possibility for volatility in EUR/GBP this week.

Brexit 4

With the UK self-imposed Brexit deadline date fast approaching (October 15th), there is the possibility for volatility in EUR/GBP this week.  EU negotiators were expected to have the text ready this weekend for the EuroGroup meeting, however, talks continue.  Some are suggesting that talks will continue into early November, in time for the next EU Summit.  Boris Johnson has threatened to walk away from the table if a deal is not “in-sight” by the 15th, but few think this will happen.  There will be high level talks this week to try and get a trade deal in place. 

One of the main issues at the heart of the deal continues to be the UK fisheries.  Both Germany and France have taken a hard stance on this issue.  Interestingly, UK fishing represents only 1% of GDP, yet it is still a main concern in the trade deal.  Boris Johnson reportedly has softened his stance regarding this issue. Other issues that continue to dominate the holdup in negotiations are state aid, enforcement of the deal,  and a level playing field.  Be aware of potential Brexit headlines this week, as they may spark a sudden advance (on news of a “no deal”) or decline (on news of a “deal”) in the Great British Pound.

To complicate matters further, the increase of coronavirus cases in Europe and the UK are concerning.  NHS England’s Powis has told hospitals in Nightingale (Northern England) to mobilize and to get ready for an influx of new patients as coronavirus cases increase.  Powis also said that there are currently more patients in hospitals in England than there were when the national shutdown began on March 23rd!  More lockdowns are imminent.  Europe is seeing its fair share of coronavirus cases as well.  France had its highest number of cases, 26,000, on a single day this weekend since the pandemic began.  Spain is in lockdown mode, with no one allowed to enter or leave the country.  And Italy has made it mandatory to wear facemasks outdoors, as the country has seen over 5,000 new cases in a single day, its highest daily increase since March.

As Brexit negotiations and the coronavirus take hold, the BOE and ECB need to keep a steady hand on stimulus until progress is made.  Although the BOE has said they are not ready to take interest rates negative,  BOE officials have been vocal that it is still a possibility. They may be setting the market up for a sudden move to negative territory if Brexit talks fail.   In addition, while the ECB is already at negative rates, bank officials say they are ready to do more.  Also, EU talks continue regarding an EU-wide stimulus package, which once agreed upon, will have to be ratified by all member nations.

On a daily timeframe, EUR/GBP is tradng within a descending channel at the 38.2% Fibonacci retracement level from the lows on April 30th to the highs of September 11th and the 50 Day Moving Average, near .9050.  The pair tried to break higher out of the channel on October 7th, however price pulled back forming a shooting star.  Often, when we see a pair fail to break out of one side of a formation, price moves to test the other side.  This level is currently just below .9000 and coincides with a rising trendline off the April 30th lows.

Source: Tradingview, FOREX.com

On a 240-minute chart, price appears to be moving lower out of a symmetrical triangle. As with the daily timeframe, price failed to break out of the top of the triangle.  One can also look at the current formation as a rectangle (red dashed lines), with price currently testing the bottom horizontal line of the triangle near .9050.   If price does break lower, watch for it to test the next support level near .9025, which is the 61.8% Fibonacci retracement level from the lows of September 3rd to the highs on September 11th.  Below that is the previously mentioned price target on the daily at .9000.  Look for short-term resistance at the downward sloping line of the triangle near .9120, then the September 11th highs at .9191.

Source: Tradingveiw, FOREX.com


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