- The UK and Germany agreed to abandon some vital Brexit demands, easing the path for a deal.
- The move provides three lessons for GBP/USD traders moving forward.
The UK and Germany agreed to focus on a smooth transition of the UK outside the European Union and leave decisions for a future relationship for the future. The two nations opted for a vagueness over details. This will facilitate a Brexit deal, and the immediate result was a leap in the value of Sterling.
This is far from being the end of the story, but it may provide a turning point, at least for trading the GBP/USD.
Here are three actionable takeaways:
1) Brexit means Merkel, not Barnier
Chief EU Negotiator Michel Barnier visited Berlin last week and met with top officials. He stated that the EU is ready to offer the UK a deal like no other country. The news sent Sterling soaring. However, we warned that this might be a selling opportunity. Indeed, Barnier gave an interview over the weekend, saying that he strictly rejects the British government’s Chequers plan. The GBP/USD reacted and kicked off the week with a considerable Sunday gap.
The previous rise began in Berlin, and so does the current one. German Chancellor Angela Merkel may be at the twilight of her political career and with a weaker mandate, but she still calls the shots. So far, Brexit seemed to have been a distraction from other European issues such as migration, the rule of law in Eastern Europe, and the budgetary rules in Italy.
But now, Merkel is making her mark.
The actionable lesson for GBP/USD traders is to listen to Germany, not to Barnier. The Chief EU Negotiator is working for the German Chancellor and is not independent. Each Brexit-related word she voices and every report coming from the Chancellery will likely have a greater effect on the Pound moving forward.
2) Nobody wants a no-deal
Maybe some hardline Brexit ideologues wish to take all possible control, but most Brits don’t, and as we now learn, senior European politicians are not ready to see even minor damage from the UK falling off a cliff on March 29th.
The UK will undoubtedly struggle far more than the EU on such a fallout, but business interests also have their say. As the Pound still prices in a non-negligible chance of a Hard Brexit, there is room to the upside. There will always be ups and downs, but the chances seem lower now.
For GBP/USD traders, it could signal a long-term uptrend. It is also good news for the euro. The EUR/USD also responded positively to the story and may continue reacting to further developments.
3) Brexit keeps rolling on
The EU did what the EU does best: kick the can down the road. This is what happened with Greece, with banks, with the budgetary rules, and now it happens with Britain. The transition deal is due to reach its end at the end of 2020. Brexit talks will likely continue until that point or beyond. Pushing back deadlines and reaching ambiguous “fudges” is what the EU does best.
The actionable thing for cable traders is to keep a close eye on Brexit headlines, from now and for a much more extended period. The Bank of England responds to Brexit and is not going anywhere fast in any case. Carney and his colleagues still matter, and so do economic data, but Brexit is an overriding priority for the Pound.
Brexit headlines are not doing their own exit.
Conclusion
Watch Chancellor Merkel, look for a long-term uptrend move, and keep a peeled eye for any Brexit headline, report or rumor to move the Pound for quite some time.
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