The Worst Gamble in History or Simply the Best?

Well, another week of uncertainty and untold amounts of Brexit rhetoric from all quarters is behind us now. Perhaps all talk of Brexit should be banned at weekends by Royal decree, so we can all take a break? Still, no one seems any the wiser as to where this will all eventually lead, but as the weekend unfolds the chances of a last ‘ditch’ deal appear much less remote than just a few days ago. As for Johnson’s gambit of insisting that he will lead the UK out of the EU on 31stOctober, with or without a deal; was that really all just the bluff of the century on the part of the Prime Minister?

Well, if that battle cry was nothing more than that, then it may still prove to be the worst gamble in history, or paradoxically, there’s still enough time for it to be the best. Certainly such a determined stance seems to have galvanised the EU into more urgent action as last week drew to a close. Earlier in the week,the pound had chosen to ignore the possibility of another delay, unless that in itself was strangely the reason for the currency’s under performance during the first half of of the week.  

However, it has been a different story since the Irish PM’s volte face last Wednesday. The pound has surged across the board, driven by a rush of sudden optimism that a deal could be reached. From a purely technical perspective, the move up from the 2019 low at 1.1959 to as high as 1.2582 had already seen a corrective move lower when the price fell to 1.2195 earlier last week.

That relapse pretty much nailed an important Fibonacci retracement move of 61.8% which was at exactly 1.2197. So, since that level held perfectly, it was the platform for another rebound back above 1.2582 on Friday. The break above that level led to further upside acceleration as the price laterreached a high on the day of 1.2707, an increase of more than 500 pips on the week. One thing to note on this move though; the price stalled on Friday evening just ahead of the 200DMA (daily moving average) which is currently at 1.2713 and was probably too much of a hurdle to surpass on the week. It may prove to be an equally tough level to hurdle next week too,until more Brexit deal detail becomes available.

The rebound on the GBPEUR, which had earlier seen the rate fall back from the previous medium term high at 1.1391, to as low as 1.1080 in the early part of last week, was not quite as impressive. However, as with GBPUSD, there was rapid acceleration as the price lifted above 1.1391, later moving to a high of exactly 1.15 on Friday.  The simple reason why the price did not trade higher than that looks largely due to weakness in the dollar pushing the EURUSD higher at the same time.

The news on Friday that really shifted the dial elsewhere was the positivity than emerged from the US/China trade negotiations. That helped to lift the mood across all asset classes and dented the risk based havens. Consequently, the USD, JPY and gold all closed lower on Friday as equity markets across the globe posted solid gains on the week. Naturally, it might be early days on this yet and possibly there’s a lot more water to flow under the bridge. That is especially the case given that the Chinese do have a track record of walking back on initial agreements.

Meanwhile, the markets are clearly buoyed, but with a degree of caution and scepticism still curbing the enthusiasm.