GBP / USD consolidates near 1.3300 as hopes for a Brexit deal hang by a thread

• GBP / USD has mostly moved sideways around the 1.3300 level in recent trading, as the Brexit news flow calms down.
• The British pound is the worst performer in the G10 on Thursday, as hopes for a Brexit deal hang in the balance.

The GBP/USD has traded mainly sideways in recent trading around the 1.3300 level, rebounding from the worst levels just below 1.3250 shortly before the start of the US trading session. However, the pair is still trading at a loss of nearly 100 pips or 0.7% on the day, as hopes of negotiating Brexit hang in the balance.

Brexit woes make GBP / USD underperform

British Prime Minister Boris Johnson and the long-awaited meeting with the President of the European Commission, von der Leyen, on Wednesday night in Brussels, brought no major surprises. The two acknowledged that significant gaps persist between UK and EU demands regarding their future trade relationship and it is unclear whether a deal can be reached. The two leaders ordered their negotiating teams to keep trying to find a solution to the deadlock, with the UK prime minister saying he didn’t want to leave any potential route to a deal untested.

The two leaders agreed that a firm decision on the future of the negotiations must be made before Sunday (so this is the new decisive date). But the odds now seem to tilt steadily in favor of a no deal being the most likely outcome, rather than a deal, hence the bearish pressure on GBP on Thursday. Officials from both the EU and the UK have essentially said that the only route to a deal is if the other party commits. Both sides seem to be pressing on their heels.

But GBP / USD bulls continue to buy on dips at the 1.3250 zone, and as long as there is hope that a deal can be reached, this may remain the case. However, if the Sunday deadline comes around and the EU and UK come to the decision that a deal is not possible and it is better to focus on no-deal planning, this level is likely to disappear quickly.

Elsewhere and also potentially adding some weight to the British pound on Thursday is the news that London, the UK capital where approximately 22% of the country’s economic activity occurs, perhaps moving to Level 3 restrictions of Covid-19 on December 19, amid an increase in the city’s Covid-19 positivity rate above 7% (above the national average of 5%). The official decision is made on December 16 (that is, next Wednesday).

Levels to consider in the event of a no-deal Brexit

Should talks between the UK and the EU about their future trade relationship fail, the downward reaction for GBP / USD is likely to be extensive. As noted above, the first support area to disappear is likely to be the 1.3250 area. So the eyes will be on the psychological level of 1.3200 and then on the 50-day moving average of the pair just below 1.3150. Below that, there is also decent support at the 1.3100 area (the Nov 12 low).