The UK and the European Union are gearing up for the final discussion of fishing rights as officials assume that they may strike a trade deal within days.
The pound sterling has risen more than 350 pips against the US dollar since the start of the trading week. Its rally was mostly due to the fact that the negotiators expressed willingness to make consensuses on the fisheries issue. The UK and EU have largely settled their differences over the other main obstacle to an agreement: equal competitive conditions for business. European Commission President Ursula von der Leyen confirmed these speculations. She said fishing rights are now the last major hurdle to a post-Brexit trade deal as Prime Minister Boris Johnson warned the UK has a "natural right" to control its own waters.
Negotiators are also warning that differences between the two parties over EU access to UK waters are still significant. If the issue is not resolved, a hard Brexit scenario looks quite likely.
The discussion of the fishing issue may end this weekend.
Boris Johnson said that Parliament, which leaves on Thursday for the Christmas holidays, can resume work at any time if a trade deal is agreed upon between negotiators. This, the ratification of the deal in parliament will not take long in case of a positive outcome.
Therefore, speculators are betting on the positive scenario of a trade deal, not paying attention to the disagreements of the parties on key issues and the ongoing economic crisis in the UK.
The pound sterling is strongly overbought and sooner or later this will affect its value.
Analyzing the trading chart of the previous day, you can see the pound sterling broke above the high of 1.3537 notched on December 4. It seems that the medium-term uptrend continues to form in the market. The last time the pound sterling hit such high levels was in the spring of 2018. To reach a new high, the British currency needs to add 800 pips. If so, it will skyrocket to the levels registered in 2016.
It remains to be seen whether the pound sterling will be able to jump to such highs. It may occur if the parties forge a Brexit deal in the coming days.
On December 16, it gained 119 pips, which was considered the lowest indicator for 6 trading days. The very fact that the result of 119 pips is low shocks many traders as in a healthy market, anything above 100 pips is already considered a strong bullish momentum
Analyzing the weekly chart, there are expectations of a change in the long-term downtrend. However, even the rise to the levels of 2016 does not give bulls enough strength to break the 13-year downtrend.
Today, investors are anticipating the results of the Bank of England meeting.
As the consequences of the latest pandemic lockdowns as well as the fate of a Brexit deal are still unclear, Bank of England Governor Andrew Bailey and his colleagues are likely to keep monetary policy unchanged. Nevertheless, they will be ready to intervene quickly if the economic situation worsens.
Economists polled by Bloomberg forecast that the benchmark interest rate will remain at 0.1%, while the quantitative easing program will total £895 billion.
Notably, the UK is experiencing the worst economic collapse in recent centuries due to coronavirus. Now that businesses are being forced to close again as the government is trying to curb the virus spread. The Bank of England projects another contraction in the fourth quarter. Bank officials also warn that production will not return to pre-pandemic levels until 2022.
Taking into account the economic situation, unprecedented demand for the pound sterling remains inexplicable.
Analyzing the current trading chart, we can see another update of local highs where speculators increase the volume of long positions which leads to a vertical movement in the market.
The pound sterling asserts strength amid expectations of a positive outcome of the Brexit trade deal and a lot of media reports that the negotiators have a chance to resolve key issues, even though the British currency is overbought.
So, traders are pricing in all the mentioned above as the British currency is now the most attractive currency.
The strategy to deal with fundamental data remains the same:
Some good news about Brexit is likely to lead to the strengthening of the pound sterling.
Some bad news about Brexit may lead to the weakening of the pound sterling.
You can find information about Brexit in the Analytics section on our website, as well as directly from the media. For example, Bloomberg, the Wall Street Journal, Reuters.
Importantly, if the Bank of England decides to reduce the interest rate or to sharply expand the quantitative easing program, this will lead to a slide of the British currency.
As for the technical levels, pay attention to the levels of 1.3650/1.3700, which may affect the volume of long positions.
Technical analysis
The analysis of different time frames shows that the technical indicators unanimously give a buy signal due to a rapid upward movement and a new local high.
Weekly volatility / Volatility measurement: Month; Quarter; Year
The volatility measurement reflects the average daily fluctuations, calculated per Month / Quarter / Year.
(On December 17, it was measure taking into account the publication time of the article)
The current dynamics is only 90 pips, which is considered a low indicator. There a lot of reasons for volatility. If it rises, the pound sterling will add gains.
Key levels
Resistance levels: 1.3600**; 1.3850; 1.4000***; 1.4350**.
Support levels: 1.3400*;1.3300**; 1.3000***; 1.2840/1.2860/1.2885; 1.2770**; 1.2620; 1.2500; 1.2350**; 1.2250; 1.2150**; 1.2000*** (1.1957).
* Periodic level
** Range level
*** Psychological level
