What's in Store for Cable After EU-UK Deal

While politicians play the deal as a reset of relations between London and Brussels, the actual agreement seems more focused on improving the tone rather than substance, but cable continues to accelerate, raising questions.

It's the Tone that Matters

Last week, to address some of the more thorny post-Brexit issues. EU Commission President Ursula von der Leyen described it as "historic", while UK Prime Minister Keir Starmer said that it would slash red tape and lower food costs. Both sides conveyed a sense of rapprochement between Britain and the Continent after nearly a decade of tensions as they adapted to the new post-Brexit reality. However, in terms of content, the impact appears somewhat underwhelming.

The main part of the agreement allows for between the UK and the EU, presumably ending the practice of seizing truck drivers' sandwiches at the border. However, it also implies that British producers will adhere to certain EU phytosanitary regulations. Britain had not imposed many obstacles for EU food entering the UK, so the deal will likely benefit British food producers looking to return to a more level playing field in the EU, rather than a substantial reduction in the cost of imported goods in the UK. The toughest part of the negotiations was the issue of fishing rights, specifically the extension of the time EU vessels could access British waters. However, this is also unlikely to have a notable impact on food prices. Other provisions, such as allowing Britons to scan passports electronically, will offer convenience for air travel to Europe, which could benefit airlines plying those routes.

A "Reset" or "Return to Pre-Brexit"

Some analysts pointed out that, with the UK working more closely with Brussels as Washington is seen as withdrawing from European affairs. The deal pointed to further negotiations, including (known as SAFE) aimed at beefing up Europe's military capabilities in light of the war in Ukraine. Furthermore, not everyone is pleased with the deal, with opposition Conservatives vowing to annul the agreement if they win an election and the second-most popular Reform party (led by Brexiteer Nigel Farage) also decrying the deal.

In terms of market reaction, traders cheered the news, sending UK stocks higher in the immediate aftermath. However, the deal did not alter much the economic reality in Britain. The BOE is still struggling to lower interest rates amid a sluggish economy and consumer prices remain stubbornly high. Unsurprisingly, the pound has continued on its trajectory. However, the pair had already been rising before the agreement, as the market had priced in dollar weakness, and it maintained that direction for most of the rest of the week, which remains the case today, nearly 10 days after the deal.

Cable Cup and Handle Breakout in Focus

Cable surged to a 39-month high after breaking the lip of a potential cup and handle pattern at 1.3450, with a proper cup depth at around 40% of the long-term leg from 1.035 to 1.3450. A short handle also increases the chances of positive performance. If bulls can maintain lip support, prices could extend to the measured-move high around 1.4760, with interim resistance levels at 1.3750, 1.40, and 1.4250. On the other hand, losing support and the 1.30 handle may open the door to the handle bottom at 1.3130, potentially invalidating the pattern. This would align with the cup shape, as it appears more like a V-shape than a smooth U-shape formation and potentially pave the way for further declines below 1.29 and towards 1.27.

Source: SpreadEX / GBPUSD

Key Takeaways

The EU-UK deal appears to be more symbolic, aimed at improving the tone of relations between the two parties. While some practical issues are addressed, such as facilitating trade in foodstuffs and extending fishing rights, the deal does not impact the UK's economic reality or its consumer prices. Still, the market reacted positively to the news, with UK stocks rising and the pound continuing its upward trajectory against the US dollar to date, though largely due to weakness in the buck.