Pound surges on reports of Brexit breakthrough

Britain and the EU are apparently on the verge of securing a Brexit divorce deal, which should pave the way for the second phase of talks – on trade – to begin.  The pound has surged past 1.35 after initially opening weaker along with other dollar pairs on news the US Senate had passed its tax reform bill at the weekend. It looks like solutions are finally in sight for the three obstacles to opening trade talks: the Brexit divorce bill, EU citizen’s rights and the issue of the border with Northern Ireland. It was already expected that the UK and EU had reached broad agreements over the divorce bill and citizen’s rights, but today reports suggest that the final obstacle – about the Northern Ireland border issue – has now been resolved.

But with the pound already making its move on the reports, it may struggle to extend those gains when the expected news is announced later on today. Nevertheless, the breakthrough of the first round of Brexit talks should remove some of the uncertainties hanging over the pound as Britain gets closers to securing its exit from the EU.

Markets will sharpen focus on UK economics

UK investors’ focus will return to domestic economics as of Tuesday as the key services sector PMI is released at 09:30 GMT. So far, the latest PMIs from the manufacturing (58.2) and construction (53.1) sectors have both beaten expectations. Will the economy score a hat-trick of solid PMI readings ahead of the release of official manufacturing production data on Friday? Next week is even more important for the pound as we will have the latest UK CPI, wages and retail sales data, along with the Bank of England’s rate decision.

If the UK economy continues to show signs of strength at a time when Brexit negotiations are finally moving in the right direction then the pound could be on the verge of staging a more significant recovery.

But with regards to the GBP/USD pair, there is the other side of the equation one has to consider too. The US dollar has been falling throughout much of this year, but with the tax reform bill almost making it into the law, the dollar could also be on the verge a potential rebound, as the fiscal stimulus provides an expected boost to the world’s largest economy, which has already been growing close to its long-term rates for a few years now.

Still, the pound may rebound at a faster rate in the short-term outlook given that the key US jobs report is not out until Friday. This could help to lift the exchange rate to new yearly highs this week. A clean break above the 1.35 resistance level is required if we are to see a run above September’s high at 1.3650. As before, our subsequent long-term bullish objectives remain at 1.3835-50 followed by 1.4000-50 area. The former corresponds with the convergence of the long-term 61.8% Fibonacci retracement level and the February 2016 low, while the latter is the pre-Brexit low and a psychologically-important handle.  Short-term support levels come in at 1.3445, 1.3380 and then at 1.3300.