GBP/USD: Noisy tone around Brexit to keep the pound on the defensive – TDS

GBP/USD (-0.9%) is weaker for a fifth consecutive day. This comes as Brexit talks resume in London today after a several-week hiatus. The risk of a No-Deal outcome remains, but the base case remains that they will eventually come to a landing. Ahead of this, however, economists at TD Securities are looking for this noisy tone to continue and keep GBP on the defensive near-term. 

Key quotes

“We are taking all this with a grain of salt. The risk of a No-Deal outcome by the end of the year remains a possibility and the latest developments are certainly not very helpful in that regard. Despite this, our base case remains that they will eventually come to a landing over the next couple of months. Away from the rhetoric, the reality is that there are only a few core issues that need to be resolved (Fisheries and State Aid foremost among them).”

“The hardening of positions by both sides is likely to keep sterling on the defensive – especially, perhaps, over the next day or two as the talks get underway. Indeed, it may be late Thursday before markets get anything concrete to sink their teeth into. This is likely to be amplified as the UK continues to suffer a more sluggish and prolonged economic recovery than some of its peers. With new coronavirus cases accelerating rapidly and running at their fastest pace since May, we think sentiment toward GBP will remain fragile.”

“It looks like cable established a double-top right around the 1.35 mark last week with its failure to break above the highs from last December. The further pullback since has seen the decline push lower through support at 1.3054. From here, an extended decline through the 1.2985/1.3005 support zone would attract increased selling pressure. For that, however, we may need to see a broader and sustained USD rally to emerge – something we are hesitant to embrace for now.”