Following three weeks of gains, the greenback started losing its strength on profit booking coupled with concerns over the US by-elections this week. While the dollar weakened, the Pound strengthened on Brexit deal optimism caused by a Sunday Times report that said Britain was close to grabbing a deal with the EU and that avoids a hard Irish border.
Brexit deal and US elections dominate currency markets
Brexit and the US mid-term elections dominate currency market movements so far this week. A Sunday Times report states that a new agreement between Brussels and London dictates the former to remain under the EU customs on a temporary basis and avoid a hard Irish border. In this regard, citing unnamed sources, the news report claims that Prime Minister Theresa May has already obtained necessary concessions and the EU has agreed to include an “all-UK” customs union in the final divorce deal.
Such an arrangement will avoid the EU’s “backstop” framework that would have administered Northern Ireland differently from other parts of Britain. Furthermore, the agreement will also include an “exit clause” which indicates that it is only a temporary arrangement, making it easy for Prime Minister May to obtain the requisite votes in the Parliament to get the deal through.
The British government and EU officials have emphasized that an agreement is close, but both parties still have work to do.
The UK officials want a special EU summit to be conducted by the end of this month to confirm an agreement. However, officials at Brussels claim May is yet to put forth a deal that satisfies the EU and also her own party.
Brexit Secretary, Dominic Raab, is said to have demanded a strict time frame to the “backstop” which is structured to keep an open Irish border. Furthermore, the minister opined that Britain should hold the right to end the backstop after three months. Without a time frame, Raab believes that the UK could be permanently locked in the European customs union if Eurocrats conclude that it is the only way to settle the hard border issue.
Presently, the EU diplomats have given a 50-50 chance for May to come up with an acceptable deal.
The lack of progress in negotiations has turned investors anxious. As a result, even minuscule updates are turning the Pound volatile. Sterling may spike sharply on any positive news regarding the Brexit deal. So far in 2018, the currency has failed to stay bullish in seven of the ten months.
The optimistic news reported by Sunday Times has turned the Pound bullish. In fact, last week was the best one for the Pound so far this year. The optimism was also fueled by the Bank of England’s hawkish statement, signaling more rate hikes in the months to come if Britain clinches a transition deal successfully.
Regarding the Sunday Times report, ING’s head of FX strategy Chris Turner said: “Any news this week that the EU would hold a Brexit summit in November would be greeted positively.”
In the US, analysts caution that an unexpected result at the midterm decisions may trigger a significant unwinding of long dollar positions and weaken the greenback which has recovered more than 7% from April lows against its peers.
Tuesday’s US congressional election is broadly anticipated to assist the Democratic Party, who have a substantial likelihood of gaining control of the US House of Representatives, with Republicans likely to hold the Senate.
Commenting on the election, Ricardo Evangelista, a senior analyst at ActivTrades Plc in London said: “On the contrary, if the Republicans put up a strong showing, that could give President Trump a freer hand, and he could step up his criticism of the Fed which may hurt the dollar.”
Regardless a dollar selloff in the latter half of last week, hedge funds added more dollars to their portfolio, taking overall long positions to its highest levels since December 2016 as recent economic data have motivated more bullish wagers. By October the 30th, the net long positions have increased to a whopping $26.74 billion, nearing its highest level since December 2016, as per the latest futures data.
On the long mounting positions in the US dollar, Manuel Oliveri, an FX strategist at Credit Agricole in London, said: “Some positions squaring is seen on the dollar before the elections this week though the euro is also soft on the latest news from Europe.”
Therefore, in the short-term, election results and stock market movements are expected to decide the course of the greenback, while Brexit related developments will determine Sterling’s trend. Presently, the Pound has a slight upper hand over the US dollar.
Technically, the GBPUSD pair has formed a near double bottom at 1.2775. Furthermore, the stochastic indicator is rising. As a result, we can expect the currency pair to remain bullish in the days ahead. The next significant resistance is expected near 1.3275.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
