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  • News that Brexit talks have entered the “tunnel”, with a deal hoped by the end of the week, has pushed GBP/USD above 1.3400.
  • Previous resistance around 1.3400 might now offer solid support, with GBP/USD likely to eye a test of year-to-date highs.

GBP has shot to fresh highs since 1 September 2020 above 1.3400 in recent trade on positive Brexit news. The pair hit highs at 1.3440, a more than 120 pip turnaround from previous Tuesday lows under 1.3320, but has now backed off to closer to 1.3400. Still, GBP/USD trades with gains on the day of roughly 80 pips or 0.6%.

Brexit negotiations enter “tunnel” with hopes for a deal by the end of the week

Times Radio’s Chief Political Commentator Tom Newton Dunn tweeted that UK/EU trade deal talks have entered the “mythical tunnel”, with Michel Barnier having stopped giving his internal debriefs to the wider EU. Moreover, both sides hope for a deal by the end of this week, although Dunn notes that talks could still fall apart.

Though neither side has formally confirmed “tunnel” status yet, the journalist continues, the UK government never recognises tunnel status in negotiations and neither side are denying it. He quoted one EU source as saying “if it looks like a tunnel, and sounds like a tunnel, it’s a tunnel”.

For context, the tunnel refers to a state of intense negotiations where, essentially, neither side leaves until they can form some sort of agreement. Though it does not guarantee a deal will be made, it shows a strong willingness/commitment from both sides to work as hard as possible to get a compromise. Most commentators will now be expecting news to break shortly suggesting that compromises have been reached on the key remaining sticking points of fisheries, state aid and level playing field.

GBP/USD has certainly taken the news that way. As argued it recent posts, it was always going to take a significantly positive Brexit update in order to knock GBP/USD out of its slumber within the 1.3300-1.3400 range – and that is exactly what markets got. It is worth noting that in the unlikely event that talks do still collapse, GBP/USD is now even more exposed to significant downside than it was before.

GBP/USD breaks above 1.3400 resistance, likely to now forge a new range

As GBP traders watch for further progress towards a deal amid tunnel negotiations, GBP/USD is likely to find a new range. This time, the bottom of the range is likely to be the top of the pair’s old 1.3300-1.3400 range, given that the 1.3400 level offers solid support. To the upside, gains may be tempered at the 1 September high in the 1.3480s.

GBP/USD one hour chart