Before the EU summit, the GBP/USD currency pair declined, with the pound falling by almost 200 points, which caused the investors to panic. The headlines of newspapers and online editions literally changed their tone quite dramatically in a day. If many analysts talked about the high probability of a trade deal between London and Brussels at the beginning of the week, then yesterday, most of them changed their minds. Just in a day, the situation turned 180 degrees: the market mood with the motto "everything will be fine" was immediately replaced by a pessimistic thought that everything will be bad.
Such a sharp plot twist put significant pressure on the pound. Its price declined not only in pair with the dollar, but throughout the market. However, it is doubtful that market participants are surprised with this, as they have been monitoring the Brexit process over the past four years. Moreover, recent events are predictable, since both sides sharply tightened their rhetoric before the key summits. In the future, the leaders of the EU countries will either postpone the deadline, extending the negotiation period, or will compromise at the last moment, as was the case at the end of last year.
But it is unclear which of the above options will be implemented this time. Both Boris Johnson and Angela Merkel previously insisted that the October summit address the key and most problematic issues of the future trade deal. However, there was news yesterday that the parties still cannot find an agreement. For example, the German Minister for European Affairs Michael Roth, who is also a representative of the German presidency of the European Union (until the end of the year, Germany is heading the EU Council) announced yesterday that the negotiations are now at a crucial stage. He specified that it will become clear whether it will be possible to reach a positive result, or whether the parties will intensify preparations for the "no deal" scenario in the coming days. A little later, French Foreign Minister Jean-Yves Le Drian also warned that "hard Brexit" is the most likely at the moment. At the same time, both officials hinted that the British refused to compromise, insisting on their terms. Today, the European Commissioner for the Internal Market, Thierry Breton, has added a fundamental picture. He announced that Brussels will not conclude a deal at any cost, while Britain will suffer more from the absence of an agreement than the European Union.
In other words, the situation is getting intense every hour, and there is also not much time before the deadline. The EU summit will start tomorrow, October 15. In general, the unfolding events are reminiscent of the events of past years, when the parties expressed their readiness for a "hard Brexit" before the key summits.
Reuters believe that the EU leaders will declare that progress in the negotiations "is not enough to conclude a new trade deal" by the end of the October summit. At the same time, Brussels will provide the negotiators with more time (tentatively - until early November), while simultaneously announcing that Europe will prepare for a "no deal" option.
This option is the most likely. In the past years, there were about ten summits before Britain finally left the European Union. In the current circumstances, the parties cannot afford to repeat this path, however, they can move the date of the signing of the deal in November or even in December.
Thus, it is too early to ignore the trade deal, despite the aggressive statements of the parties, which is part of a political game that will continue for several weeks.
In conditions of such uncertainty, it is better not to trade the pound/dollar pair, since the movement of its price can change several times during the day. In the medium term, long positions are assumed to be a priority. But the sales look too risky: the pound may respond positively to the prolongation of the negotiation process. In this case, much will depend on the accompanying statement of Johnson and the leaders of the EU countries.
Technically, the main target of the upward movement is still 1.3120, which is the upper line of the Bollinger Bands indicator on the daily chart.