Brexit in a week from 7/10 – 13/10/2019

Last week offered us enough excitement when the British Pound significantly strengthened by almost 500 pips on Thursday and Friday, following a statement after a meeting between the British prime minister Boris Johnson and the Irish prime minister Leo Varadakar, when it was mentioned that a Brexit agreement is possible. The upcoming super week will therefore be very important, as it will be definitely decided whether Brexit will occur on 31.10.2019 or not.  More details on it are in the following text.  

Fundamental analysis

The meeting between the British and Irish prime ministers, which took place on  October 10, 2019, brought an unexpected wave of optimism to the Brexit negotiations. Both prime ministers mentioned that Brexit agreement is possible. The specific answers to whether or not Northern Ireland will remain in the European Customs Union have not been confirmed by Boris Johnson yet. It was only mentioned that both prime ministers saw that an agreement could be reached, but that did not mean that the agreement was already concluded.
No formal opinion has been taken on the draft agreement sent by the British Government to the European Commission yet. The proposal allegedly states that the so-called Irish backstop should be replaced by such customs measures which will not lead to a hard border between Ireland and Northern Ireland. The British Government wants to introduce customs controls at ports in the Irish Sea and beyond the Irish and Northern Irish borders.
From a macroeconomic point of view, further data on GDP development were reported last week, when  on a year – on – year basis GDP reached 1.1%  compared to the previous value as at September 30, 2019, which was 1.3%. Further, data on changes in property prices were presented with the Halifax House Price Index as at September 30, 2019 reaching -0.4% (as at August 31, 2019 it was 0.2%).
Monthly manufacturing output as at August 31, 2019 was - 0.7% (0.4% as at July 31, 2019).   Manufacturing production accounts for 80% of total industrial production in the United Kingdom.

Technical analysis as at October 13, 2019

The GBPUSD currency pair offered us a really strong move over the past week. The price opened at 1.23 and closed at 1.265. The high was even 1.27. So, on the weekly chart, see Figure 1, a strong bullish candlestick was created last week that broke through the first resistance zone. This candlestick could indicate a further upward move.

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Figure 1: The GBPUSD on weekly chart

At the same time, we can see that the price is close to the next resistance zone and also near to the downward trend line. In order to break these lines, a very strong impulse would have to come, which could be a definitive statement that the Brexit agreement was reached.
In the daily chart, see Figure 2, we can see that in the past week the price first dropped to support level 1.22, which we pointed out in the previous article. Then, on Thursday and Friday, the price rose sharply, breaking through the resistance, which was the moving average of the SMA 100, and the resistance, which was the last high at 1.257, which has now become a support.
We can also see that  a higher high and a higher low formed, which in terms of price action means that the previous downward trend reversed. We have drawn the current growing channel into the chart and updated Fibonacci levels.

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Figure 2: GBPUSD on daily chart

Since the price is close to the resistance levels, it will be appropriate now to wait for a price correction if we want to speculate long. For example, if the price fell to the bottom of the growing channel, there could be trade entries.

Resistance 1 is at the level around 1.270-1.2770.
Resistance 2 is approximately 1.2850 - 1.290. Here,  there  is a confluence with the Fibonacci level 61.8 and the resistance that was created on May 17, 2019 by breaking the previous support, see Figure 1.
Resistance 3 is at the level 1.3180-1.3200.

Support 1 is now in the zone 1.2530-1.2570.
Support 2 is in the band around  the level 1.2330. This level is a confluence of the lower line of the growing channel and the Fibonacci level 50.0, see Figure 2.
Support 3 is at the level 1.22, where the last higher low was formed. Should the price fall below this level, it can be expected for the price to test  the level 1.20 again. This scenario could happen in particular if the Brexit agreement is not concluded and if there is a risk of no-deal Brexit without the agreement.

Should it be announced that the United Kingdom has finally agreed with the EU on the new version of  Brexit agreement, this currency pair can be expected to strengthen further.
 

What awaits us this ‘super’ week?

We can call this week as a ‘super week’, because there will be two major meetings based on which it will be definitely clear whether Brexit will be on October 31,  2019 or whether it will be postponed. The conclusions drawn from the meeting between prime ministers Johnson and Varadakar need to be further officially confirmed now. First,  the draft agreement submitted by the British Government must be approved at the European Council meeting on September 17 and 18, 2019.

After that, the British parliament will meet at the weekend. For the first time in this century, parliament meeting will take place on Saturday, namely  October 19, 2019. At this meeting it will be decided whether the agreement that prime minister Johnson negotiated with the EU, will be approved or not. If the agreement is approved, then Brexit could occur on October 31, 2019. If it is not approved, the prime minister is obliged by law to ask the EU to postpone Brexit until January 31, 2019.

If the agreement is not approved by the British Parliament, it is possible that the next step will be the vote of no confidence in Boris Johnson's government.

From the UK's macroeconomic data,  employment data, namely the Unemployment Index, Claimant Count Change and Average Earnings  will be reported on Tuesday. Inflation data (CPI Index) will be reported on Wednesday and data on Retail Sales will be released on Thursday.
The GBPUSD currency pair may also be affected by US data. Data on Retail Sales will be presented on Wednesday and further information will be provided on the development of demand on the property market (the so-called U.S. Building permits) on Thursday .

Important: depending on the decision of the British Parliament to approve or not to approve the Brexit agreement, a large gap on all GBP currency pairs can be expected when the market opens on 20 October 2019.
 

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