• Joel

GBP slammed as UK officials “abandon” hopes of trade deal with EU

GBP slammed as UK officials “abandon” hopes of trade deal with EU

GBP has been getting hit hard today, with GBPUSD trading lower by about 35 pips despite an otherwise relatively “risk on” feel to FX market trade (amid post EU Recovery Fund agreement optimism), as well as prevailing USD weakness that has seen DXY slip below the 95.00 level for the first time since the 9th of March this year.

A variety of bearish factors (in addition to the recent EU deal on the recovery fund) have been driving USD weakness in recent weeks, including 1) the Covid-19 outbreak being worse in the US than in other developed markets, 2) the associated, incoming dovish shift from the FOMC towards further monetary stimulus, 3) the fact that Trump (a USD positive President) looks likely to lose the White House in November (after which USD positive tensions with China would likely ease under Biden), 4) the huge risk asset rally since the late-February to mid-March panic sell off (which is a negative for havens such as USD) that has powered US and other equities to close to all-time highs and huge recovery in commodities and risk sensitive FX.

As a result, EUR, AUD, NZD and gold are all at multi-month and even multi-year highs vs the dollar. GBP, by contrast, cannot even surpass its best levels seen last month.


In short, pessimism that the EU and UK will be able to agree a trade deal by the end of the year, meaning growing expectations for a disastrous (as the market sees it anyway) WTO end to transition period.

This feeling has been compounded by a report this morning by the Telegraph, which stated that the UK is close to abandoning hopes on a post-Brexit EU trade deal and that UK government's working assumption is that UK will trade with the EU on WTO terms. Moreover, added the article, senior sources state that the assumption is that there will not be a deal, but a "basic" agreement could be reached if EU gives ground in Autumn.

GBP hates the idea of a no-deal end to the transition period at the end of the year (as it is seen as a big negative for the UK economy). Given that this morning’s article implies the likelihood of such an eventuality is growing, GBP has been hit hard this morning.

In the coming weeks, so long as EU/UK trade talks remain deadlocked, expectations for the UK to end the transition period with the EU without a deal are set to rise – this is likely to continue to weigh on GBP.

In terms of what this means for GBPUSD then; traders will have to balance the ever-weakening USD with an ever more vulnerable GBP. So long as DXY does continue to head lower, I do expect GBPUSD to continue to crawl higher, but, as we have seen this week, it gains will likely continue to be much more modest compared to the gains seen in AUDUSD, NZDUSD and EURUSD none of whom are dogged by huge domestic concerns like GBP (the whole Brexit malarkey).

Note - Negotiations between the UK and EU on their future relationship continue today. The latest round is scheduled to end around lunchtime tomorrow, when there may be a press conference. As you might expect, given the news we had earlier about the UK abandoning hopes for a deal and putting no deal as the base case, expectations for any breakthrough are pretty low. 



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