GBP got absolutely slammed this week; against USD, it fell roughly 500 pips (at the time of writing) to beneath 1.2800 (having started the week just off 1.3300). Meanwhile, EURGBP rose roughly 350 pips. In other words, GBP is finishing the week just under 4% lower than it started vs USD and EUR.
Technicals certainly contributed to GBP’s decline. At the start of the week, GBP broke through a long-term uptrend that had prevailed since late June, only to then crash through its 21- and 50-day moving averages. To the downside, the 100- and 200-day moving averages are yet to be breached (they are at 1.2737 and 1.2693 respectively). If they go, we could be in for even more selling pressure.
But the key reason for today’s sell off, as I sure ALL of you are likely already aware, was Brexit!
The UK government this week introduced legislation called the Internal Markets Bill which seeks to maintain seamless intra-UK trade in the event of a no deal end to the transition period with the EU, and in doing so overrides key aspects (relating to border checks between Ireland and Northern Ireland) of the EU Withdrawal Agreement signed by both the UK and EU last October (which aimed to keep the flow of people and goods on the island of Ireland as seamless as possible to avert a return to violence and terrorism from groups like the IRA).
Unsurprisingly, the EU was angered by this proposition by the UK, which in the event of a no deal end to the transition period, would mean that the UK would end up violating the terms of its agreement with the EU on Ireland.
After calling an emergency meeting on Thursday to see if they could iron out the issue with the UK, the EU was left unsatisfied and issued the UK government with a warning that it better withdraw the internal markets bill legislation by the end of the month, though they did not specify exactly what they would do.
While the whole internal market bill distraction was going on, we had the eighth round of EU/UK negotiations, which unsurprisingly, made no progress on key issues such as level playing field, state aid and fisheries.
Thus, after a hectic week in terms of Brexit related newsflow and a new twist to the saga introduced with the UK governments push for the EU Withdrawal Agreement violating Internal Markets Bill, traders have concluded that the chances of a trade deal between the EU and UK at the end of the year are much less than at the start of the week.
Remember, GBP hates the thought of a no deal exit from the EU single market as it would cause economic havoc and likely another recession (when we haven’t even recovered more than half of the economic activity lost from the Covid-19 pandemic yet.
What to lookout for next?
In terms of what twists and turn in the Brexit story might affect GBP next, there are a few things;
1) Can the internal market bill pass the UK House of Commons unamended?
In other words, can the bill be passed into law without it being hamstrung in some way (for example, MPs could vote for an amendment that means for the law to override the Withdrawal Agreement in the case of no deal at the end of the year, parliament’s approval would be needed).
The bill will be debated in the House of Commons of Monday, with the UK government seeking to cram it into law by the end of the month. But The Times reported last night that up to 30 Conservative MP rebels may vote for the amendment mentioned above.
That would still not be enough to stop the bill from passing in its unaltered form, but there could be more rebels yet to come out of the woodworks over the weekend. The passing of this bill unaltered is not guaranteed.
2) How will the EU react if/when the bill is passed?
The EU have thus far refrained from collapsing talks over the future relationship with the UK over the internal markets bill (that would have likely sent GBP another 200 pips lower vs USD).
But, as noted, they have given the UK until the end of the month to remove the bill.
Thereafter, the preferred course of action seems to be to take legal action against the UK over its violation of the withdrawal agreement, rather than collapsing talks.
Indeed, a no deal exit for the UK is also a big economic disruption for Europe.
But a lot can change in the interim, and the option to pull the plug on talks is still very much there. Any hints that the EU is looking more likely to go that route will cause further jitters in GBP.
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