The coronavirus outbreaks are still wreaking havoc across all of Europe. Many countries are still in lockdown or under heavy restrictions. Help is on the way as talks of a widely available vaccine are roughly 6 months out but getting there will be the tough part. The UK is holding up well data wise, as their lockdown did not include manufacturing businesses and retail sales data were strong. European data isn’t as strong. For the UK, the Markit Composite PMI Flash for November was 47.4 vs 52.1 last, though the Manufacturing PMI was better. The European Markit Composite PMI Flash for November was 45.1 vs 50 last, with both manufacturing and services weaker. Both the ECB and BOE have indicated that they will provide more stimulus (though the BOE have talked down negative interest rates). And both the European Union and the UK are putting together additional fiscal stimulus, however the current EU budget is being vetoed by Hungary and Poland as they feel the budget punishes counties that block immigration.
Most of this information is being pushed aside at the moment as the world waits for the outcome of a Brexit trade deal. Bottom line: Will there be a Brexit trade deal or not?
This is the question that is going to ultimately move the EUR/GBP. As of Friday, not much has changed week. The same core challenges remain:
- An enforcement mechanism to govern the deal
- A level playing field (free and fair trade)
- Access to fishing waters surrounding the UK
To make discussions more difficult, an EU staff member has tested positive for the coronavirus last week, forcing the negotiating team into quarantine. Talks will continue virtually. The markets though are hopeful that “something” will happen THIS WEEK! Although there seems to be a new deadline every day, some key official deadlines are approaching, most importantly December 14th-17th which is the last EU Parliament meeting for the year and perhaps the last opportunity for all 27 EU member nations to agree on a deal. In the meantime, the deal needs to be hammered out and the language must be written and reviewed for the ultimate vote to take place. Otherwise, the UK leaves the EU with no-trade deal and significant tariffs and barriers to trade would be implemented, which would be more hurtful to the UK. As such, many EU leaders are telling their countries to prepare for no-deal Brexit.
As of mid-September, markets appear to believe that “something” will get done. On a daily timeframe, EUR/GBP has been in a downward sloping channel since September 1st, which indicates a stronger Pound relative to the Euro. On November 10th, the pair broke below a rising trendline from the April 30th lows near .8970. Since then, EUR/GBP put in a recent low of .8861, which is horizontal support and the 50% retracement from the February lows to the March 19th highs.
Source: Tradingview, FOREX.com
If a Brexit deal does get done this week, expectations for a lower EUR/GBP (stronger GBP). As such, support levels to keep in mind are the lows at .8970, the downward sloping channel trendline near .8835, the 61.8% Fibonacci retracement level from the previously mentioned timeframe near .8740, horizontal support at .8670 and they February lows near .8281. If indications are that there will not be a Brexit deal, resistance above is at the downward sloping channel trendline and the upward sloping trendline near .9000, then way up at the September 11th highs near .9300, and then the March 19th highs near ,9490.
Keep in mind that Thursday is a US holiday and Friday is a half day. Liquidity will begin drying up significantly on Wednesday during the US Session and will continue to be light for the rest of the week. IF A DEAL IS REACHED TOWARDS THE END OF THE WEEK, WE COULD SEE EXTREMELY VOLATILITY IN THE POUND AND EURO. Make sure to use proper risk management!