• All eyes towards the support zone 0.8720-0.8700
  • We are ripe for a breakdown to 0.8600
  • Renewed Brexit headlines remain the key driver on GBP

The euro cross traders remain focused on both data and event risk. Since more than a week the UK media hinting that the UK and the EU reaching a Brexit deal sooner than later, but the confirmation note is as uncertain as ever. We still believe the Brexit headlines remain the key driver on GBP in the near term (up to year-end).

According to Bill Diviney Senior Economist and Nick Kounis Head Financial Markets Research in ABN AMRO said, Our base case remains that an orderly Brexit is the most likely outcome to the negotiations. To break the impasse, it looks likely that the UK will accept that the backstop is in some way indefinite, but with some creative wording to ease the concerns of eurosceptics in the Conservative Party. However, as the latest developments underscore, our conviction level in this base scenario is low, and the risk of a disorderly Brexit continues to be very high.

Whereas Credit Agricole analysts said, Our central case remains that the EU and UK will clinch a Brexit deal by the end of 2018.

At the time of preparing this article, recent Brexit headlines strengthen the GBP across the board. The cross EURGBP is trading at  0.8730 (8.50AM, AEST).

EU data shows that they are prepared to provide the UK with an “independent mechanism” to end the temporary tariff arrangements (British Times), reported by Wallstreetcn.

Besides, the recent mixed PMI data are not that supportive to the GBP. The UK manufacturing sector slowed sharply during October, HIS Markit reported. Output growth weakened, while new order inflows and employment both declined for the first time since July 2016.

Turning to Construction PMI, IHS Markit said UK construction companies indicated a sustained increase in business activity during October.

Data review:

  • IHS Markit Manufacturing PMI fell to a 27-month low of 51.1, down from September’s revised reading of 53.6.
  • At its meeting ending on 31 October 2018, the MPC voted unanimously to maintain Bank Rate at 0.75%.
  • Construction PMI printed at 53.2 in October, up from 52.1 in September.

Data preview:

We will see Q3 GDP figures (Fri), and we expect Q3 GDP could be around 0.7%.

TECHNICAL OVERVIEW

As we said in the last couple of weeks, renewed Brexit headlines are the catalyst for the GBP in the coming days/weeks. We also think the euro cross EURGBP to remain volatile in the tight range between 0.8900 and 0.8600 in the week ahead.

The weekly technical outlook remains extremely volatile; daily and weekly indicators are still very bearish. We expect the cross could fell below 0.8700; this would point to a new downward wave towards the next support around 0.8620/0.8600.

The flip side, resistance levels are located at 0.8775 and 0.8800. A breakout above 0.8800 would strengthen the ultra short-term recovery to 0.8900.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

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