GBP/USD, FTSE 100, Brexit, UK-EU Trade Negotiations – Talking Points:
- Risk appetite notably soured during APAC trade as coronavirus concerns continue to drag on investor sentiment
- Renewed ‘no deal’ Brexit fears may prevent further upside for GBP/USD as it approaches a key inflection point
- FTSE 100 index seems poised for further declines with price perched precariously above pivotal support. Could a sustained sell-off be on the cards?
Asia-Pacific Recap
Coronavirus concerns continued to dictate market sentiment throughout the Asia-Pacific trading session as the re-imposition of lockdown measures in Melbourne, Australia’s second largest city, hampered regional risk-sensitive assets.
The Australian Dollar retreated alongside the ASX 200 as Chinese equities paused for breath after a historic surge above the 16,000 handle. S&P 500 futures notably declined after daily new cases of Covid-19 in Texas jumped above 10,000 for the first time.
News that the Trump administration may look to undermine the Hong Kong Dollar’s peg to the US Dollar could fuel further risk aversion in the upcoming session as the world’s two biggest economies continue to go toe-to-toe.
Looking ahead, comments from European Central Bank Vice President Luis de Guindos may prove market moving whilst EIA crude oil inventories could help to support WTI prices should stockpiles decline more than expected.
Market reaction chart created using TradingView
UK Ready to Leave EU on ‘Australia’ terms
Although the United Kingdom’s recovery “has come sooner and has been faster” than originally anticipated, Bank of England Chief Economist Andy Haldane stressed there remains “a huge amount of uncertainty about what paths the economy might take from here”.
This uncertainty may be compounded by reports claiming that Prime Minister Boris Johnson informed German Chancellor Angela Merkel that Britain would be ready to leave the European Union on “Australia” terms at the end of the transition period, if a ratified deal fails to get across the finish line.
Source – Office for National Statistics (ONS)
The introduction of an agreement mirroring the EU’s current trade terms with Australia – based primarily on World Trade Organization rules - would be economically crippling for both parties, resulting in the imposition of restrictive quotes and tariffs.
That being said, the Prime Minister may be attempting to soften the bloc’s position on several contentious issues holding back the negotiations as the EU remains firm in its attempts to garner a ‘level playing field’.
Nevertheless, the ongoing talks may continue to act as an anchor on the British Pound and regional risk assets as investors adapt to the distinct possibility of a ‘no deal’ Brexit.
FTSE 100 Daily Chart – Yearly Downtrend Capping Upside Potential
FTSE 100 index daily chart created using TradingView
When accounting for the UK’s fundamental backdrop, it comes as no surprise that the FTSE 100 index has grossly underperformed its major counterparts.
From a technical perspective, the outlook remains tilted to the downside despite price remaining temporarily underpinned by Ascending Channel support and the 50-day moving average (6,105).
The development of the Momentum indicator reinforces the bearish tilt seen in recent price action and could potentially encourage sellers, should it break through support extending from early-April.
A close below the July low (6,084) is needed to validate bearish potential, with a break below the psychologically pivotal 5,800 level possibly leading to a resumption of the primary downtrend.
GBP/USD Daily Chart – 200-DMA Stifling Buyers
GBP/USD daily chart created using TradingView
The British Pound continues to benefit from US Dollar weakness as it surged back above the 50-DMA (1.2460) after finding support at the psychological 1.2250 level.
With the RSI strengthening above its mid-point, a push above the 200-DMA (1.2590) to test the April high (1.2648) may be on the cards.
However, a break of the June high (1.2813) remains relatively unlikely should the RSI fail to break above its key inflection zone into bullish territory above 60.
A swift reversal of the oscillator may ignite selling pressure, with a close below the 50-DMA (1.2460) potentially carving a path back to the June low (1.2252).
-- Written by Daniel Moss, Analyst for DailyFX
Follow me on Twitter @DanielGMoss