GBP/USD rebounds despite latest Brexit setback

The GBP/USD managed to make back its entire losses after gapping lower overnight to trade near the day’s highs at the time of writing. This is despite the fact there was still no breakthrough in talks between the UK and EU over the issue of Northern Ireland. The two sides have struggled to find a solution on how to avoid new border checks between Northern Ireland and the Republic of Ireland, with UK Prime Minister Theresa May dismissing the EU's suggestion of keeping Northern Ireland aligned to its trade rules as a backstop arrangement.

Although the UK PM today said that the EU had "responded positively" to her proposal for a UK-wide arrangement and the two parties are “not far apart” on the Irish border issue, the EU still insists on a second backstop arrangement of involving Northern Ireland only if the UK's version wasn't ready in time. So, nothing has changed and therefore a deal looks increasingly unlikely to be achieved at this week's summit, which starts on Wednesday.

But judging by sterling’s reaction over the past few weeks, the market is nonetheless growing confident that the UK and EU will be able reach a last minute deal in the not-too-distant future anyway, as this outcome is best for both parties.

Busy week for UK data

Meanwhile from a data point of view, this could be an important week for the GBP/USD. We have already had some surprisingly soft US retail sales figure today, which is probably part of the reason the GBP/USD had not fallen more despite the latest Brexit setback. We will have the first of the three major UK economic data releases on Tuesday when the ONS publishes the latest wages data. On Wednesday we will have the UK CPI measure of inflation followed by retail sales a day later on Thursday.

Sterling has been on an uptrend in recent weeks, making back a big chunk of its recent losses against the dollar while doing particularly well against the euro. It is all to do with optimism that the UK and EU are close to forming an agreement over Brexit. In the event there is more progress then we should expect to see the pound remain bid.

GBP/USD’s technical view: bullish

The technical outlook on the GBP/USD has improved in recent weeks. Here are some of the key technical highlights we think might be useful to consider:

• GBP/USD’s first monthly green candle was created in September after 5 consecutive months of red candles. So, the trend of lower monthly closes ended last month, which is bullish.
• In September, the cable also broke above a previous month’s high for the first time in 5 months. Thus it made a higher high, which is the first major sign suggesting a low has been formed.
• We are now well into October and so far the cable is above the monthly open price (of around 1.3040). It is therefore still on course to end higher for the second consecutive month.
• Given that the monthly bias is bullish from the previous month (when it ended a run of downward closes), price is therefore in bullish territory at the moment and will remain that way until and unless it goes back below last month’s low
• Three of the past four weekly candles had a bearish feel and look to them (as highlighted on the weekly chart in the inset). Yet price has refused to fall. The lack of downside follow-through suggests that the sellers are perhaps losing control of the trend and maybe getting trapped.
• While the 50-day SMA is pointing higher, price is still below the 200 which has a downward slope so the longer-term trend is still technically and objectively bearish

So, given the above technical considerations, we are bullish on the GBP/USD’s short-to-medium term outlook. Thus, we view any short term weakness as a retracement within an overall bullish price structure. This bullish view would be revised, however, if we see the unfolding of a distinct bearish reversal pattern.

Figure 1: