“Buy on rumors, sell on facts” – this trading principle is now actively implemented by traders of the pound-dollar pair. The British pound was actively strengthening throughout the market during the day, reacting to optimistic rumors about the prospects for a trade deal. Yesterday morning, traders recorded a price low at around 1.3350, while today the pair jumped to 1.3618. The nearly 300-point growth was driven solely by Brexit. The news was contradictory, but traders staked on a positive outcome of the negotiations. And they did not lose: on the eve of the Christmas weekend, the parties nevertheless reached a compromise solution and “shook hands.” But the pound fell under a wave of selloff as soon as the agreement was officially announced.
The reasons for this behavior are quite banal: market participants in large numbers began to take profits on the GBP/USD pair, leaving long positions. Ahead the long weekend, which will last until Tuesday. Then a small “break” and again the holidays, this time New Year’s. On the eve of the festive time, traders do not risk leaving open orders, especially when the price is at such high values.
On the other hand, this does not mean that the market has won back the Brexit deal. It’s just that the politicians came to a compromise at the most inopportune moment, from the foreign exchange market’s perspective: in the pre-new year period, traders are forced to trade in conditions of low liquidity and, roughly speaking, are not able to adequately respond to the ongoing processes. At the same time, it is worth recognizing that today there was an event that would have an impact on the pound not only in the medium term, but also in the long term. The achievement of the fortieth figures can now be discussed not only in a hypothetical context – this price horizon will serve as a kind of beacon for GBP/USD buyers in 2021. But it will be possible to consider the pound’s growth prospects in a practical plane after New Year’s, as in the near future we will increasingly face abnormal price movements. Traders and market makers, as a rule, close both the month and the year in the final week, so the New Year’s eve price celebrations have already become a kind of tradition.
Now a few words about the deal itself. According to the Reuters news agency, the British made significant concessions over the last day of negotiations – including on the distribution of quotas for fishing in the UK’s exclusive economic zone. It is noteworthy that such a scenario was voiced by insiders of the Financial Times publication last week. Then journalists warned that the deal will be concluded at the last moment, and actually on the terms of the Europeans. London was not really going to lose the single market, as the affected party would eventually be Britain, not the European Union. At least for the reason that the UK sends more than 40% of its exports to the EU countries, while the key countries of the bloc send only 5-6% of their exports to the British.
It is worth noting that the details of the agreement have not yet been made public. Prime Minister Boris Johnson only noted that the deal will provide the country with a trade turnover of 660 billion pounds a year, protect jobs and allow exporting products without tariffs and quotas. Also, according to him, London has ensured that the European Court will not be able to resolve disputes that may arise between London and Brussels in the future. In turn, the chief negotiator from the EU Michel Barnier said that the UK and the European Union maintain a visa-free regime and “full access to each other’s territory and maritime space.” However, the deal does not include general positions on foreign policy, but allows for synchronization of sanctions.
They also announced that the parties agreed to create a Joint Partnership Council, which will monitor compliance with the deal and facilitate discussion of controversial issues. We do not know how this Council will be formed and what leverage it will have.
It is obvious that all information gaps will be filled in the very near future, as the parties have yet to ratify the approved deal. The British Parliament will meet for an emergency session on December 30. But the European Parliament will not have time to consider this issue this year, so the parties agreed to apply a special legal mechanism, thanks to which the deal will be de facto effective from January 1, even without ratification by the European Parliament.
It is better not to open any trading deals on the GBP/USD pair right now: the thin market can present unpleasant surprises. But in general, long positions remain a priority in the medium term (not to mention the long term). The first target is this year’s high at 1.3624. The main target is located slightly higher – the upper line of the Bollinger Bands indicator on the monthly chart, which corresponds to 1.3680. Overcoming this resistance level will open the way to the 37th figure area.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.