Prepare For Volatility In The EUR/GBP Pairs

European Union – United Kingdom Trade Negotiations Enter Final Act

by Bogdan Giulvezan

UK Prime Minister Boris Johnson has chosen October 15 as the deadline for striking a trade deal between the UK and the EU. The European Council meeting is also set to start on the same day and EU negotiators have pointed out that this the last chance to iron out differences.

According to the European Council meeting agenda: “The European Council will take stock of the implementation of the withdrawal agreement and review the state of the negotiations on the future EU-UK partnership. Leaders will discuss preparatory work for all scenarios after 1 January 2021.”

The United Kingdom voted to leave the European Union more than 4 years ago and it seems like we have reached the final act when both sides are required to make a decision. Let’s see if they can finally put aside their differences and reach an agreement that falls within the boundaries of common sense.

The Week Ahead

The first day of the week is rather slow, without major releases and with the US banks closed in observance of Columbus Day. The action picks up Tuesday, October 13, with the release of the US Consumer Price Index, which is one of the main gauges of inflation. The release is scheduled at 1:30 pm GMT and the expected change is 0.2%. Numbers above this forecast have the potential to strengthen the US Dollar.

Thursday, October 15 get ready to see some Sterling and possibly Euro volatility because the European Council Meetings start and the main topic will be the dreaded trade deal. Keep in mind that the meetings will last 2 days (Oct. 15 and 16).

For the last day of the week, we turn to the greenback once again for the release of the Retail Sales and Core Retail Sales reports. The time of release is 1:30 pm GMT and the expected change is 0.4% for the Core version (excludes automobile sales from the calculation) and 0.7% for the vanilla report. Any values above expectations can boost the US Dollar because sales made at the retail level account for a large part of overall economic activity.

The Technical Scene – GBP/USD

So, what’s next for the British Pound? We will probably have to wait until the EC meetings conclude and possibly until a trade deal is reached. At the time of writing the Pound is trading at 1.3030, with a bullish bias, and is winning the short-term battle against the US Dollar.

A significant resistance level has been recently broken (1.3000) but often times after a major break, price returns to the level for a re-test. On the 4-hour chart below, we can see that the Stochastic is overbought and crossing down, a fact that supports the idea of a potential retracement to the recently broken level. Just keep in mind that the next medium-term direction for GBP pairs will be highly influenced by this week’s EU – UK trade negotiations.