Pound Turns Bullish as UK & EU Strike Brexit Deal

Pound Turns Bullish as UK & EU Strike Brexit Deal

The GBPAUD pair rallied last week on expectations of a last minute breakthrough in the Brexit talks. As anticipated, the British Prime Minister Theresa May brokered a successful agreement between the Irish government, Democratic Unionist Party (DUP) and the EU to take the Brexit negotiations forward. The details of the agreement, as explained below, indicate that the Pound would remain bullish at least until trade related talks begin in January. On the contrary, the Australian dollar remains weak on poor economic data and dovish monetary policy of the RBA. Thus, we anticipate the GBPAUD pair, which is trading at 1.7840 levels to move up in the days ahead.

On Friday, The Irish Deputy Prime Minister Simon Coveney stated that his country supports the Brexit talks to move to the next level, as necessary assurances are in place for the island. The important aspects of the agreement between the UK and EU are as follows:

i. UK committed itself to avoid a hard border (between Northern Ireland (considered part of the UK) and the Republic of Ireland (which will remain a part of the EU).

ii. Total financial settlement (Brexit Bill) would be around €60 billion ($81 billion).

iii. Both the EU and UK citizens will retain their rights, which includes social security and health care, tax advantages, employment, and education rights. However, they will be bound to the country in which they live. Around 3.7 million EU citizens currently live in the UK. Likewise, approximately 1.2 million UK citizens live in the EU.

iv. The Court of Justice of the European Union (CJEU) will have the final say when it comes to cases involving the EU citizens in the UK.

Following the preliminary agreement, talks are expected to start soon after Christmas to formulate a transitional agreement that would keep the UK as a de facto member of the EU until 2021. In this regard, the European Council President Donald Tusk told reporters that the UK and EU should move quickly and ensure that an agreement is in place soon for the sake of enterprises on both sides of the channel. If the transition deal gets signed early next year, then it would certainly pave way for the Bank of England to hike the interest rates. That would strengthen the Pound further.

While the last minute Brexit discussions went on in the Europe, the Australian Bureau of Statistics (ABS) reported a dismal Q3 GDP growth of 0.6%. The preliminary estimates had pegged the GDP growth to 0.9% Analysts had anticipated a GDP growth of 0.7% for the third-quarter. For the annual growth rate to stay at the current level of 2.8%, the fourth-quarter economic expansion should not be below 0.9%.

Household consumption accounts for 55% of Australia’s $1.74 trillion economy. However, the debt level of the Australian consumers is rising faster than the wage rise, despite the low unemployment rate of 5.5%. In the recent quarter, the household consumption grew just 0.1%, the smallest growth recorded since 2012. Due to these reasons, the Reserve Bank of Australia left the interest rates unchanged at 1.5% in the latest monetary policy meeting held last week. Thus, positive sentiment is expected to lift the Pound against the Aussie, which remains weak on dovish policy from the RBA.

Technically, the GBPAUD pair is forming a bullish ascending triangle pattern as shown in the image below. Further, the vortex indicator confirms the bullishness is still intact. Thus, we expect the currency cross to break above the base of the triangle pattern.

GBPAUD - Technical Analysis - 11th December 2017

A long position may be opened by us, near 1.7840, to gain from the analysis. To limit losses, a stop loss order will be definitely placed below 1.7740. If the pair rallies, then we will sell our long position near 1.8130.

Additionally, we may invest in a call option to benefit from the GBPAUD pair’s uptrend. To go ahead with the intended trade, we require a binary broker to offer us a contract valid for one week. Further, the currency pair should trade around 1.7840 levels.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.

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