Brexit Crunch Time — What’s Happening? (and a look at GBP/USD)
By: The Duomo Initiative
Tags: UK, Brexit, Trading, Gbpusd, Forex

It’s crunch time! Another week, another Brexit deadline looming.

I’m sure you’ve heard this before, but this seems to be the final week to get an agreement done between the UK and the EU. Although it seems any time there’s a deadline it only gets missed anyway, so who knows if this one will actually force some progress to be made.

Either way, I’m sure we can expect the markets to respond to whatever happens this week. So let’s discuss the situation and take a look at what opportunities may be out there for GBP/USD.

Crunch Time for Brexit

Let’s start with why this week is a critical one, or as the Irish foreign minister called it, “crunch time”.

Earlier this year, on 31 January, the UK officially left the EU. However, it was agreed the UK would follow the rules of the EU until the end of the year to allow time for an agreement to be made about what will happen post Brexit.

That means, the deadline for an agreement is 31 December. If nothing is signed off by then, the UK and the EU will default to the World Trade Organisation’s rules, with tariffs being imposed on imports and exports. This is even up to an extreme of 40% tariffs in some cases, such as with lamb exports from the UK.

The problem is, after a deal is agreed in principle, the EU still have a political process to go through; the ratification process (when an agreement is signed and given formal consent — so it’s not officially valid until then).

The European parliament has outlined that the final date they could vote on that would be 14 December. Although there is a suggestion that it could be pushed a little bit later.

The EU has estimated that if a deal is struck, the process of having it legally prepared and translated would take about 3 weeks before it is put forward for the ratification process. It’s expected to be about 1,800 pages long if you include the annexes, so longer than the entire Lord of the Rings trilogy — literally!

So that, in a nutshell, is why this week is so critical, because after this week it will be 3 weeks until the 14 December vote.

GBP/USD Technical Analysis

Here you can see the weekly chart, in the short term we’ve had a bit of bullish structure but the critical level is around 1.330 where the price has continued to find more upside.

It will take a lot of momentum to break such a solid significant level, so it’s likely to require big news from the Brexit negotiations.

I do think there will be some sort of agreement, this week or next. Therefore, I would be looking for long trades after a pull-back to the unconfirmed trend line on the weekly chart, or the previous higher low (although that would be a bit riskier due to the path of resistance above it).

Looking at the daily chart the ideal situation would be to trade after a pull-back to the lower trend line or after a break and retest of the upper minor trend line. That way there’s a chance to build a slight profit-buffer before price tests that critical swing high. If that happens, we can use our trade management to stack the odds in our favour, using the slight profit to our advantage.

Of course, if a deal isn’t done that would be negative for the pound and we could see that short-term bullish structure being broken. Depending on what time horizon you’re looking at, you could argue that there’s already weakness in the structure, which doesn’t bode well for bullish moves.

Is A Deal Likely to Happen?

According to a tweet from David Frost, the UK and EU “now largely have common draft treaty texts, though significant elements are of course not yet agreed”.

Those significant elements are still about EU access to British fishing waters and the so-called ‘level playing field’ for businesses. The same issues they have been struggling with for a while.

Frost has said the only way they will agree a deal is if it’s compatible with British sovereignty; taking back control of British laws, trade and waters.

What’s Next?

There are suggestions that Boris Johnson, the UK prime minister, may be about to strike a deal and give in. At the very least, it seems quite likely that he may rethink the Internal Market Bill that was rejected by the House of Lords last week. Even if a deal is agreed this week, the EU won’t ratify the agreement if the clauses that break international law are still there.

In addition to that, now that Biden has won the US election, that puts more pressure on Boris to change course. Biden has made it very clear there will be no trade deal between the US and the UK if they do anything that threatens the Good Friday Agreement. The Internal Market Bill risks upsetting that and therefore could not only risk an agreement with the EU but the US too.

The odds increased of those clauses being changed in the Internal Market Bill on Friday, after Dominic Cummings was released from Boris Johnson’s team. He was the architect behind the successful Brexit campaign and it has been suggested his team is the reason for extreme tactics being used in the government, which would include the Internal Market Bill. With him gone, relations in government may be improved and a more experienced cabinet could be used that may lead to better progress being made.

Since Boris has told major Tory party donors over the weekend that next year will see the Tory party revived, it’s unlikely he’ll want to start the year with bad relations with the EU and the US. I think he’ll want a deal done.

However, for now he’s in self isolation again due to being in contact with someone that tested positive for coronavirus. Isn’t that just 2020 in a nutshell?!

So keep an eye on developments on Brexit and those key significant levels on GBP/USD. There should be some opportunities coming up this week and potentially big ones at that. Obviously UK stocks will be affected too, but I’m focused on cable for now.