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Thursday, November 26, 2020

GBP/USD nosedives as risks of a no-deal Brexit re-emerge

  • The GBP/USD pair declined as worries of a no-deal Brexit returned ahead of the eighth round of talks.
  • In a statement, Boris Johnson said that the UK economy will do fine without a deal with the EU.
  • The two sides needs to have a deal ready by October 15 this year.

The British pound (GBP/USD) is the worst-performing currency in the G10 today. It has dropped by more than 1% against the dollar, 0.35% against the euro, and 0.90% against the Australian dollar.

British pound has fallen against key peers

British pound falls as odds of a no-deal Brexit rise

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The sterling fell today as traders reacted to the rising risks that the United Kingdom will not reach a free trade agreement with the European Union. This happened ahead of the eight phase of Brexit talks that will start tomorrow in London.

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In a statement today, Boris Johnson said that while he wanted a deal, his government was actively planning for the alternate scenario. He also said that a no-deal Brexit will be a good outcome for the United Kingdom. He said:

“I want to be absolutely clear that that would be a good outcome for the UK. As a Government we are preparing, at our borders and at our ports, to be ready for it. We will have full control over our laws, our rules, and our fishing waters.”

The statement came a few hours after the Financial Times reported of the government’s plan to undermine the withdrawal agreement that Johnson signed in October to prevent a hard border in Northern Ireland. The government is doing this by adding sections that threaten the arrangement in the internal market bill.

A source told the FT that the bill will give the government a right to “to set its own regime, directly setting up UK law in opposition with obligations under the withdrawal agreement, and in full cognisance that this will breach international law.”

Still, the UK is at a disadvantage during these talks because of the trade dynamics between the two sides. According to the UK government, the country sells 47% of its goods to the European Union. The EU, on the other hand, sells less than 5% of its goods to the EU.

At the same time, several companies Honda and Airbus have warned that they will move or downsize their UK operations.

GBP/USD technical outlook

GBP/USD technical outlook

The daily chart shows that the GBP/USD pair has been in an upward trend since bottoming at 1.1413 in March. It reached a year-to-date high of 1.3480 on Monday last week and formed a shooting star pattern, which is usually bearish. The pair has also fallen in the past four consecutive days and has moved below the 14-day exponential moving average (EMA). It is still above the 28-day EMA and the 23.6% Fibonacci retracement level.

Therefore, it seems like the pair has reversed, meaning that it is likely to continue falling as bears target the 23.6% retracement at 1.3038. On the flip side, a move above last week’s high of 1.3480 will invalidate this forecast. It will signal that there are bulls keen on pushing it to 1.3500.

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