20.10.202000:08 Forex Analysis & Reviews: GBP/USD. Miracles of stress tolerance: Pound rises, despite EU summit's disappointing results

The dollar is falling, the pound is growing: these are the trends on Monday. The British currency withstood the blow after the devastating EU summit, while the greenback is losing ground amid political uncertainty in the United States. This disposition made it possible for buyers of the GBP/USD pair to test the key resistance level of 1.3000. Last week, traders could not gain a foothold in the 30th figure, and after the results of the summit in Brussels were announced, they completely retreated to the middle of the 28th price level. But the pound found the strength to confront the situation, so today it took revenge. Today's news background contributed to the growth of GBP/USD.

So, the EU summit, long-awaited by many traders, ended last Friday to no avail. The parties could not find a compromise on many key issues and, accordingly, could not agree on a trade deal that would regulate relations between Britain and the European Union from January 1, 2021, when the post-Brexit transition period ends. If London and Brussels fail to find a common denominator by January, the British will have to trade with the EU on common terms, like all WTO members. That is, pay the same fees that companies from third countries pay now.

During the summit, British Prime Minister Boris Johnson once again offered the Europeans the so-called "Canadian option", according to which London will conclude a deal with Brussels, similar to the Comprehensive Free Trade Area (CETA) Agreement between the European Union and Canada. This option allows for almost duty-free trade, with the exception of a number of goods and services market. Alternatively, the British propose to go according to the "Australian option." In this case, the parties can choose on which sectors of the economy they can come to an agreement, while all other areas will be governed by the rules of the World Trade Organization. In turn, the EU representatives once again reminded Johnson that the future relations between the UK and the EU cannot be compared with the relations between Brussels and Canada or Australia (with which the EU also has a separate deal).

In addition, the parties were unable to reach a compromise on the most difficult issues of the deal under discussion. In particular, we are talking about issues of compliance with fair competition, fishing and dispute resolution mechanisms. Given this outcome of the negotiations, the rhetoric of the representatives of London and Brussels was predictable. Both Boris Johnson and Britain's chief negotiator David Frost said over the weekend that the UK is "preparing to trade with the EU without an agreement." According to them, this option involves, in particular, the introduction of export taxes and customs inspections. European representatives were more restrained in their assessments, but at the same time said they were not ready to conclude an agreement "at any cost".

Despite such disappointing results of the summit, the pound not only stayed afloat, but even showed character Monday afternoon, rising against the dollar to the 30th figure. What is the reason for such stress tolerance? First, the disastrous result was predictable - the day before the summit, there was information that the meeting would not end the negotiations. One could, of course, hope for a miracle, but it did not happen. On the whole, the empty results of the summit were already included in prices. Secondly, (and, in my opinion, this is the most important thing), the parties agreed on further negotiations. It is worth recalling here that on the eve of the summit, Boris Johnson threatened to interrupt the dialogue if the parties did not make progress. The French, who are the most ardent opponents of the British on the Brexit issue, voiced a rather tough position. But de facto negotiations continue, albeit (for now) by telephone.

Moreover, today there was information that the British government is ready to revise the most controversial provisions of the controversial bill on the internal market in order to break the deadlock in negotiations with the European Union. Let me remind you that the aforementioned bill, in fact, negates some provisions of the already concluded Brexit deal (we are talking about the "transparency" of the Irish border). The resonant document was approved in the Lower House of Parliament (i.e. in the House of Commons) and sent for approval to the Upper House (i.e. in the House of Lords). It is worth noting here that the lords cannot cancel an already adopted bill, but can make their own changes by sending the document for reconsideration. So, according to Bloomberg, the Lower House will agree with the pro-European amendments of the Lords and thereby unleash the existing problem. Actually, this was the reason why the pound grew.

In general, longs are still relevant for the GBP/USD pair. Figuratively speaking, the market "didn't believe" the failed results of the October EU summit, as there is a general confidence among traders that the parties will eventually come to a compromise at the November meeting (scheduled for 15-18), or prolong the transition period. This explains the fact that the pound held back the blow, despite all the loud statements, accusations and other negative signals. As soon as the pair settles above 1.3000, we can consider buying to the next resistance level of 1.3090 - at this price point, the upper line of the BB indicator coincides with the upper border of the Kumo cloud on the daily chart.