GBP on a wild rollercoaster: Here's why
For GBP, today has been one of the those days that has drilled home the idea that, if you want long-term success as a trader, you simply cannot ignore fundamentals. Sterling has been at the mercy of Brexit updates, which caused GBPUSD to swing between a 160 pip range (lows of roughly 1.2820 and highs of roughly 1.2960).
Let’s walk through when has gone on…
0840BST/0340EDT – We had headline come out saying that Britain and the EU had failed to close differences in on state aid in crucial talks this week, according to EU sources. Moreover, the sources noted that even if a deal is agreed upon, final EU consent would depend on the UK withdrawing its controversial Internal Market Bill, or the IMB as it is abbreviated to (remember, this is the UK legislation that breaks the Withdrawal Agreement signed by the EU and UK just under 12 months ago).
Problem is, the UK House of Commons (the elected MPs) has already passed the IMB. It would be highly embarrassing for the UK to now backtrack on the bill, and you can be pretty certain that the Brexiteer UK government is not going to take a loss like that. The thing is, the IMB is only activated in the instance that there is a no deal end to the transition period at the end of the year; so it I do not understand why the EU are pushing to embarrass the UK government into pulling the IMB, when signing a trade deal with the UK deactivates the IMB anyway? It all probably comes down to negotiating strategies and each side trying to get leverage over each other.
Anyway, at the time GBPUSD slumped to the 1.2880s from previous levels just below 1.2950.
0920BST/0420EDT – We then had sources confirmed that, following the UK missing the EU’s deadline to withdraw the IMB, the EU was beginning legal proceedings over the UK’s breaking of the Withdrawal Agreement (as noted above, the agreement signed last October). The EU has sent the UK a "letter of formal notice", and the UK has one month to respond. This news was expected, but still gave GBP some reason to sell off. GBPUSD dropped another 50 pips over the next 45 mins to make lows of the day around 1.2820.
1210BST/0710EDT – An FT reporter tweeted that UK officials are still optimistic on a the prospect of getting a Brexit deal done. One reportedly said "we’ve gone from about 30% chance of a deal to the other way around. I think it’s almost certain we’ll enter the tunnel.” On this sudden Brexit optimism, GBPUSD immediately shot higher to make fresh highs of the day around 1.2980.
1400BST/0900EDT – However, around two hours later, EU officials came out to downplay the optimism created by UK officials; they noted that there is currently no sign of a “landing zone” (agreement) with the UK of the issue of fisheries and level playing field, and positive commentary by UK officials is “UK spin”.
GBPUSD subsequently reversed much of these kneejerk gains seen after FT report tweet to trade back in the 1.2860s.
What next for Brexit and GBP?
Well, things likely won’t always be quite as crazy as today, but expect GBP to remain subject to choppiness on Brexit related headlines. As for whether or not we are going to see a deal; negotiators will likely feel more pressure to get something done around the mid-point of this month, and then again towards the end of the month – if we are going to get a deal, it will most likely happen then. It goes without saying that a deal would be a HUGE GBP positive.
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