GBP/USD: Trade talks resume quickly reinforcing optimism for further gains – MUFG

The pound is still only middle of the range despite Brexit optimism after sharp gains on Wednesday which lifted the cable to an intra-day high of 1.3177 and lowered EUR/GBP closer to the 0.9000-level. All eyes are on a Brexit deal, which economists at MUFG Bank believe will be reached, suggesting further upside for the sterling.

Key quotes

“While broad-based US dollar weakness helped to lift cable, it was primarily a pound driven move on back of positive Brexit developments. The UK government’s decision late last week to withdraw from further trade talks with the EU until they displayed ‘some fundamental change of approach’ has proven short-lived. EU chief Brexit negotiator Michel Barnier and UK chief Brexit negotiator David Frost agreed yesterday to resume face to face trade talks. EU officials will now travel to London today with the intention that intensified negotiations will take place every day until a deal is reached as part of a ten-point plan agreed upon for further negotiations.”

“The UK’s decision to resume trade talks was encouraged by comments yesterday by Michel Barnier to the European Parliament in which he stated that ‘an agreement is within reach if we are on both sides prepared to work constructively and in a spirit of compromise’ while insisting that the EU was not seeking to undermine UK sovereignty. It reinforces the impression that the UK government’s threat last week was more of a storm in a teacup.”

“Market participants’ were never convinced by the political posturing as the pound held its ground, and they are now more convinced that both sides are heading towards a trade deal. The unprecedented COVID-19 shock, rising support for independence in Scotland, and prospects of President Trump losing the Presidential election and undermining efforts to secure a quick US-UK trade deal are all increasing pressure on the UK government to avoid a no-deal outcome.”

“The pound has now returned to levels where it was the last trading in early September prior to the sharp sell-off in response to the unveiling of the UK’s controversial Internal Market Bill. According to the latest IMM report, long pound positions amongst leveraged funds were relatively modest ahead of this week’s advance. It suggests scope still for further pound gains if the intensified talks finally lead to a trade deal.” 


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