• Joel

GBP Bears Growl as UK Heats Up Brexit Rhetoric

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Finally, after weeks of tracking the strengthening EUR and ignoring domestic risk, GBP appears to have realised the gravity the Brexit situation.

For months, talks have made no progress, with UK refusing to submit to EU demands on the issues of fisheries, level playing field and state aid. Nonetheless, GBPUSD was able to rally from below 1.2500 at the beginning of July to nearly as high as 1.3500 last week.

Driving the move higher was, as mentioned, a strengthening EUR but also a softening USD. The improvement is global risk appetite (as seen by rising global equity and commodity prices) likely also helped risk-sensitive sterling.

The whole rally, analysts warned that GBP was getting “complacent” about Brexit risks. Yet expectations for the imminent decline were consistently confounded, in what appeared to be a “short-squeeze” – at the beginning of July, investors were short sterling, according to CFTC data. However, by the end of August, net speculator positioning had returned to roughly neutral, if not slightly long.

Over the last three weeks, GBP had looked vulnerable to a potential rebuilding of short positions, which would drive the currency lower – this appears to have been the case today, with GBPUSD over 1% lower on the day after an explosive weekend of Brexit headlines.

The key points to note this weekend are 1) UK PM Johnson has said that the UK will walk away from talks with the EU on October 15th should the two sides have still not made any progress by then and 2) the UK is looking at new legislation that would override parts of the withdrawal agreement signed with the EU last October, a that is said to be threatening negotiations and has, judged by the response from European officials, angered the EU.

“The UK government appears to be hardening its negotiating stance ahead of this week’s crunch talks which makes it even more unlikely there will be a breakthrough” says MUFG. That latter point, that recent developments make it even more unlikely there will be a breakthrough, is the key thing weighing on GBP today.

GBPUSD has slipped to around the 1.3150 mark, having opened trade for the week closer to the 1.3300 mark on Sunday evening. Meanwhile, EURGBP, which spent much of last week making fresh multi-month highs beneath the 0.8900 level, has sharply reversed higher back towards the 0.900 level, with many banks calling for a move in the cross back to above 0.9100 (that would be one-month highs).

The move higher in EURGBP reflects the fact that the EU makes up nearly 50% of UK trade, where as the UK makes up a substantially smaller portion of the EU’s total trade, meaning that a hard Brexit, which some in the ruling Conservative party are welcoming, will hurt the UK more than the EU.


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