10.07.202011:34 Forex Analysis & Reviews: GBP/USD: between Sunak and Brexit

The British currency was optimistic this week. The weakness of the US currency, the ambitious plans of the Ministry of Finance of the UK, as well as the absence of bad news from the negotiation front allowed the pound to return to the framework of the 25th figure, and even test the 26th price level. However, buyers could not maintain their positions, especially against the backdrop of a general strengthening of the American currency at the end of the trading week. In my opinion, the growth of GBP/USD is initially doomed to failure - the only question is at what exact moment the price reversal will occur.

The fact is that all the fundamental factors that served as the basis for the strengthening of the British currency are quite unreliable. For example, the pound received support from Brexit earlier this week. Information appeared on the market that Brussels was ready to yield to the most difficult issue of fish fishing. Let me remind you that the differences here are insurmountable. London considers the requirements of the European Union to provide access for European fishermen to British fishing areas unacceptable, calling it incompatible with the future status of Great Britain as an independent coastal state. Brussels insists on the contrary. As many analysts believe, negotiators will not be able to resolve these differences at their level, which means that the current negotiations are a priori doomed to failure.

But, according to the British newspaper, The New European, the main EU negotiator Michel Barnier is supposedly ready to back down on this issue. He proposed a model based on the "zonal binding " – that is, the British quota shares will depend on the length of stay of fish populations in the waters of the Kingdom. According to Brussels, this is also the interest of London: with climate change, large volumes of fish will shift to the exclusive economic zone of Britain. In addition, according to journalists, Barnier retreated from the requirement to leave the current level of access to the UK's waters to EU vessels. According to him, this policy was initially unbalanced, so it is subject to revision.

It is worth noting here that various rumors around the negotiation process arise regularly, but they are not always subsequently confirmed. Moreover, incomplete information could be in the hands of journalists: it is unlikely that Brussels decided to compromise without requiring mutual concessions. It is still an open question whether the British agreed to be mutually flexible.

Therefore, in this case, the Brexit issue is not a "reliable ally" of the pound. This is not the case with the plans of the Ministry of Finance of Britain: Rishi Sunak has provided quite strong support for GBP/USD this week. The head of the department promised to allocate more than 30 billion pounds as additional assistance to the economy. First of all, assistance will be provided to the labor market (bonuses for the return of laid-off employees to work, reduction of value added tax, temporary cancellation of property tax when purchasing real estate, etc.).

Of course, this factor is a serious driver for the growth of GBP/USD. However, the buyers of the pair risk falling into the trap, now opening long positions - the degree of uncertainty around Brexit is too high.

On the daily chart, the pair tested the upper line of the Bollinger Bands indicator (that is, 1.2660) yesterday. However, the bulls could not break through this resistance level, after which the price receded and at the moment, it is quite trading weakly between the middle and upper lines of the Bollinger Bands indicator in anticipation of the next information signal. This signal will come from Brexit. This refers to the parties' comments on the results of the current round of negotiations on the prospects for the transition period. It is worth noting here that traders clearly have high expectations, given the previous newspaper rumors. Therefore, if the rhetoric of Barnier and his British counterpart is pessimistic, the pound will collapse to the first support level (1.2440 – the upper limit of the Kumo cloud on the daily chart) in just a few hours. If the negotiations end in a neutral manner, the market reaction may be restrained – the pound paired with the dollar may again test the resistance level of 1.2660, but it is unlikely to be fixed higher.

All this suggests that the upper dynamics of the GBP/USD pair must be treated with extreme caution. The pound is rising amid positive messages from the UK Treasury Department, as well as thanks to encouraging rumors about the prospects for negotiations. However, if the current round, contrary to expectations, ends in failure again, then the pound will instantly be knocked down. The Brexit issue has an unconditional priority for the pound, while other fundamental factors (even as strong as the support of the Ministry of Finance) play a secondary role.

Thus, trading decisions on the GBP/USD pair should only be made after the announcement of the interim results of negotiations between London and Brussels.