GBP/USD - Net negative setup?

  • Risk reversals drop despite Brexit optimism.
  • Irish issue lingers.
  • Technicals favor the downside.

The GBP/USD closed below 1.34 yesterday, possibly due to concerns surrounding the Irish border and the dwindling prospects of a deal ahead of next week’s summit. The daily close below 1.35 also revived the demand for bearish bets, as indicated by the risk reversals gauge.

Risk reversals

The one-month 25 delta risk reversals gauge collapsed yesterday to -0.613 from the previous day's print of -0.325. It indicates increased demand for the GBP put options.

Focus on Brexit negotiations

The UK data docket is light today, hence the focus remains on Brexit negotiations. As per Reuters report, British Prime Minister Theresa May told her Irish counterpart Leo Varadkar that she would propose suggestions to Brexit negotiators over the next 24 hours to try to break an impasse on the issue of the Irish border.

The sharp decline in the risk reversals indicates investors are concerned about the lingering Irish border issue and fear that it could kill the rally in the GBP/USD.

GBP/USD Technical Outlook

Momentum studies - 5-day MA has topped out, but 10-day MA still heads north. On the 1-hour, a bearish 50-MA and 100-MA crossover is seen. The RSI on the dailies is declining but is still above 50.00. The technicals and the slide in the risk reversals point to a net negative set up. However, a breakthrough on the Irish border issue could turn the tables in favor of the bulls.

FXStreet Chief Analyst Valeria Bednarik writes - " The pair keeps a short-term negative bias according to technical readings in the 4 hours chart, as the Momentum indicator heads south at fresh 1-month low, while the RSI also heads south, around 40. Also, the 20 SMA has accelerated lower well above the current level, while after breaking lower, recoveries are being contained by sellers aligned around the 50% retracement of the latest bullish run at 1.3385. The immediate support is 1.3345, the 61.8% retracement of the same rally, with a break below it opening doors for an extension toward 1.3250/60 during the upcoming sessions."

Support levels: 1.3345 1.3300 1.3260

Resistance levels: 1.3385 1.3430 1.3465

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