After a meeting between Donald Trump and Chinese leader Xi Jinping at the Group of 20 summit, the two leaders reached a 90-day cease-fire in their trade dispute. Global investors are cheering the breakthrough that assumes that the US will hold off on his plan to raise tariffs on $200 billion in Chinese goods early next year.
Against this backdrop, high-yield currencies resumed their ascent against the dollar, including the British pound. Cable is testing the 1.28 barrier on Monday, trying to get out of a bearish channel after four weeks of losses. However, despite the current recovery, the general upside potential in the GBP/USD pair looks limited.
The UK Parliament will vote on Brexit deal on December 11. If the Prime Minister fails to win this vote, the opposition Labour Party would call a no-confidence vote. If May’s government survives a vote of no confidence, Labour could launch a campaign for a second referendum on remaining in the European Union. In other words, there are still significant political risks in the context of the ‘divorce process’ that will likely prevent the GBP bulls from more aggressive steps at least until the vote next week.
Technically, the upside potential is limited either – as long as the cable trades below the 1.30 barrier, the downside risks persist, even if the risk-on sentiment remains and the greenback continues to trade on the defensive.