December 21, 2020 at 07:57PM

GBP/JPY and GBP/USD have reversed their daily losses – which exceeded -1% at times – and are now positive on the day.

Brexit Deal Overview:

  • UK Prime Minister Boris Johnson is said to have conceded demands on fisheries in order to help get a Brexit deal across the finish line.
  • GBP/JPY and GBP/USD have reversed their daily losses – which exceeded -1% at times – and are now positive on the day.
  • Retail trader positioning suggests a bearish bias to GBP rates.

Avoiding a ‘No Deal, Hard Brexit’

The British Pound is rallying as UK Prime Minister Boris Johnson is said to have conceded demands on fisheries in order to help get a Brexit deal across the finish line. The previous demand that the UK retain some 60% of international fishing waters has been dropped to 33%, contingent upon the EU making concessions elsewhere; the EU’s position regarding fisheries has been steadfast at 25%.

Avoiding a ‘no deal, hard Brexit’ is a top priority for the UK, particularly as a new mutation of COVID-19 has sparked swift lockdowns in London and by foreign neighbors. At the time of writing, GBP/JPY and GBP/USD have reversed their daily losses – which exceeded -1% at times – and are now positive on the day.

Read more: Brexit Latest: GBP/JPY, GBP/USD Rates Pin Breakout Hopes on Brexit Deal

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GBP/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (DECEMBER 2019 TO DECEMBER 2020) (CHART 1)

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A lot of volatility has yielded little by way of direction in GBP/JPY through December. To this end, the forecast from early-December holds: “GBP/JPY rates have traded sideways through the second half of November, but the consolidation appears to be occurring within the context of a symmetrical triangle dating back to the March coronavirus pandemic low. Resistance has been found around 140.01, the 76.4% Fibonacci retracement of the 2020 high/low range. A bullish piercing candle on the daily chart on Monday, November 30 suggests that topside pressure remains. Similar to GBP/USD rates, traders should be on alert for bullish breakout potential in GBP/JPY rates. “

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IG Client Sentiment Index: GBP/JPY Rate Forecast (December 21, 2020) (Chart 2)

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GBP/JPY: Retail trader data shows 50.89% of traders are net-long with the ratio of traders long to short at 1.04 to 1. The number of traders net-long is 36.53% higher than yesterday and 20.63% higher from last week, while the number of traders net-short is 17.29% lower than yesterday and 18.22% lower from last week.

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We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/JPY prices may continue to fall.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBP/JPY-bearish contrarian trading bias.

GBP/USD RATE TECHNICAL ANALYSIS: DAILY CHART (DECEMBER 2019 TO DECEMBER 2020) (CHART 1)

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GBP/USD rates have jumped from the rising trendline from the March and November lows, experiencing a high degree of volatility in recent weeks with the fate of a Brexit deal on the line. Although fresh yearly highs were achieved last week, resistance remained in the form descending trendline from the November 2007 and July 2014 highs – that is, until today, with the large bullish hammer candle forming on the daily chart. It’s been previously noted that “breaching 1.3539 and sustaining a breakout move higher would indicate a long-term bottom has formed in GBP/USD rates.” With a Brexit deal in sight, a bullish breakout may soon gather pace in GBP/USD rates.

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IG Client Sentiment Index: GBP/USD Rate Forecast (December 21, 2020) (Chart 2)

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GBP/USD: Retail trader data shows 46.83% of traders are net-long with the ratio of traders short to long at 1.14 to 1. The number of traders net-long is 24.80% higher than yesterday and 34.05% higher from last week, while the number of traders net-short is 9.46% lower than yesterday and 23.83% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBP/USD prices may continue to rise.

Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBP/USD price trend may soon reverse lower despite the fact traders remain net-short.

From: Christopher Vecchio, CFA
Selected by fonecable.com

The second to last week of December kicked off with losses in currencies and equities. By the end of the NY session however, much of the weakness eased leading many investors to wonder if anything could sap the equity rally. The Dow Jones Industrial Average fell more 400 points shortly after the NY open but ended the day flat. The dollar started the day strong but gave up part of its gains as well. This is a shortened trading week but a variety of factors could influence how the dollar trades. Congress reached an agreement on a $900 billion coronavirus relief package that would keep millions of Americans from losing their jobless benefits. This is no panacea for the economy but its a breath of fresh air after months of haggling. Unfortunately this deal failed to lift stocks because of broader, more concerning factors.
The most important of which is the mutant coronavirus strain. Over the weekend Prime Minister Boris Johnson said this new strain is 70% more infectious. This prompted the UK government to impose intense restrictions across the country including the city of London. These tier 4 restrictions prohibit residents from leaving their homes except for essential activities and gathering indoors with anyone outside of their household. Non-essential businesses have also been forced to close. Fearing the spread of this virus, countries around world from Germany to France and Canada have raced to ban flights from the UK. So its no surprise to see sterling fall sharply against the US dollar and euro. Another Brexit deadline has been missed as well, raising the risk of a no deal Brexit and further losses for the currency. Brexit and coronavirus uncertainty should benefit the US dollar as investors seek safe haven assets.  
The only question is whether investors are worried about the new coronavirus strain. The media is making a big deal out of it, governments around the world are not taking chances and banning travel but based on the recovery in stocks, investors don’t share these concerns. This is due in part to UK officials saying there’s no reason to think that the vaccine won’t protect against this new fast spreading strain. However the vaccine is new, distribution has just begun and its just far too early to declare the vaccine effective on both strains. At any point in time, renewed uncertainty could drive the greenback higher. 
Last but not least, year end flows will also affect how currencies trade over the next two weeks. 2020 was marked by broad based US dollar weakness and equity market gains. The Dollar Index fell to 2.5 year lows this year while the Dow Jones Industrial Average hit record highs. If portfolio managers were to rebalance, they would need to sell US stocks which could drive the dollar lower but rebalancing usually happens on a monthly basis and in December, there was very little movement in stocks. 
The US has the busiest economic calendar this week but even so, there are few market moving reports. Revisions to Q3 US GDP and existing home sales are due for release Tuesday followed by personal income, personal spending, new home sales and the final University of Michigan consumer sentiment report. UK GDP revisions will also be released tomorrow with Canadian monthly GDP due on Wednesday

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