- GBP/USD has been sent back towards election day lows in hard Brexit fears.
- PM Johnson is determined to prevent a Dec 2020 extension, will legislate to prevent such an extension.
- A break below 1.3050 opens risk to 1.2700, 200-DMA. Bulls, on the other hand, seek a bargain before the next leg up.
GBP/USD’s cloud-nine time is up and the anticipated uncertainty about the extension of the transition period has come home to roost early for the bulls. GBP/USD has tumbled back to test below the 1.31 handle and bears have wiped the floor clean with the bulls in a full-on reversal of the UK election rally.
GBP/USD is currently trading at 1.3126 at the time of writing having travelled from a high of 1.3335 in a move that started in early Asia following a Telegraph report which indicated that PM Boris Johnson intended to legislate against the possibility of extending the Brexit transition period beyond 2020.
This (transition uncertainty) was always the risk which faced the pound, but it has kicked up far sooner than anticipated. Leaving without a trade deal is much the same as a hard Brexit – consequently, the soft Brexit premium is currently being priced out of GBP and bulls have been sent back to the drawing board, having peaked too soon at 1.3514 the post-election Tory victory high.
When the UK leaves the EU on 31 January, difficult and complex negotiations over the future relationship will begin. The country will remain in the single market and customs union until 31 December 2020 with an extension of the arrangement permitted for up to two years if it is both found necessary and agreed before 1 July.
The government has said, however, it will legislate to prevent such an extension. While the Tory Party manifesto made clear that it will not extend the implementation period, the announcements that it will be put into law are, quite frankly, bewildering for markets that know all too well that 11 months would be insufficient to negotiate a comprehensive trade deal. The negotiations are going to have to deal with multiple areas, not just a free trade agreement, which will require detailed negotiations. By enshrining in law his campaign promise not to extend the transition period beyond the end of 2020, Johnson cuts the amount of time he has to strike a trade deal to 11 months from nearly three years. Markets are of the mind that the move is reckless and clearly bearish for the UK economy and currency.
The laws needed to enact Brexit will be put before parliament on Friday, Johnson’s spokesman had said earlier.
Johnson sends a bold message to the EU, but at what cost?
However, on the other hand, it is not as if the UK will be bound to any domestic legislation and if push came to shove, such legislation can be easily reversed, perhaps faster than it was put into law in the first place, especially considering Johnson’s 80-seat majority. It would appear that Boris Johnson is determined with his ‘social-justice’ agenda, acknowledging the UK’s vote, to send a bold message to the EU and move quickly on behalf of the UK population, but at what cost?
The bloc’s chief Brexit negotiator, Michel Barnier, has warned that 11 months is not enough time to strike a comprehensive trade deal. If negotiations between the EU and UK fail to strike a deal and the transition period were not extended, then World Trade Organisation (WTO) terms will kick in which is more burdensome for businesses on both sides.
On Thursday, the Queen will formally open Parliament. PM Johnson will be laying out what he hopes to achieve in a Queen’s speech and on Friday, the PM will re-introduce his Brexit deal to Parliament and there could be more light shed on all of this then. Bulls will be looking to capitalise on any headlines that are to the contrary to this latest development and seek a bargain before the next leg up in GBP.
UK data taking a back seat to Brexit risks
Meanwhile, it might be too soon to delve into UK economic data, but this week is a busy one for the UK calendar. Yesterday’s PMIs were a disappointment and today’s jobs data made for some food for thought.
“For now the official jobs data doesn’t look quite as bad as other hiring indicators have signalled,” analysts at ING Bank argued, however also warning that with “Brexit uncertainty already making a comeback and investment set to remain low in 2020, hiring appetite is unlikely to improve significantly any time soon.”
The employment data for the three months to October showed the unemployment rate unchanged at 3.8%, but better than the expected 3.9%. Employment gains surprised to the upside at +24k. This all of course comes ahead of the Bank of England meeting on Thursday but is unlikely to pose any challenge to the status quo.
UK Inflation Preview: CPI bottoming, positive ahead of the BOE?
Looking ahead
It seems that the honeymoon period for the bulls has come to an abrupt end with this We think GBP faces sudden and fast liquidation of near-term long positions. Looking forward, analysts at TD Securities think cable may be relegated back to “untradable” status now that No-Deal is back on the table for end-2020. “Hopes for renewed inflows to UK markets may instead be met with investor disengagement as longer-term risk/reward deteriorates again. Ahead of this, the 1.3100/10 zone should provide support ahead of the Election Day low of 1.3051. Beyond this, 1.3011 would be the next target for GBP bears.”
GBP/USD levels
Despite the hardcore fundamentals, from a technical basis, there are still bulls among us:
GBPUSD – Looking To Buy On Pullbacks Into Support
On the other hand, analysts at Commerzbank argues that a daily chart close below the 1.3050 December 12 low would put the 200-day moving average at 1.2700 back on the plate.
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