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GBP and Brexit: the catharsis

GBP and Brexit: the catharsis

Information is not investment advice

Looking at the H4 chart, it is obvious that the British pound is going through increasing scales of instability. It is no surprise: Brexit is nearing its end, nothing is reached, and if it was a theatrical performance instead of a 9-month negotiation process, it would be the revelation scene now.

What’s happening?

The UK and the EU negotiators have failed to meet each other’s interests so far. They are pretty frankly admitting that, and most observers and officials are more pessimistic than not about the Brexit outcome. That’s the primary reason Boris Johnson flies to Brussels to speak to Ursula von der Leyen: if representatives fail to agree, let’s see if the country leaders do.

If you remember, there has been a lot of noise recently around the UK PM’s intention to unilaterally break the conditions of the divorce the UK agreed on before – something that he was pushing through the UK Parliament and that cost him a couple of his key aides (not to say a couple of millions of his supporters). Now, with the fact that neither the UK nor the EU wants to make the first step in giving concessions to the other party, Boris Johnsons’s comment that he is fine to step back on that intention may well be a tactical move so that he could come to Ursula von der Leyen with a phrase like “see, I already made my step – your turn now” with no cost. The tactic here is that you make false intimidation to your opponent first, then you back down on it with a now-agreeable approach seen as “already a step forward”, while you have made no true concessions on substance of the deal so far. A bluff, in other words. Many observers were discussing that before. Now it’s time to see if that works well – for the UK at least.

The price of a no-deal? They say it’s around 0.5% GDP for the EU, and 3% for the UK. So both sides would bear damage if no agreement takes place, but the UK will be definitely hit harder. Everyone knows that, the EU knows that, and that’s one of the reasons the EU is adamant on its position. So the vulnerability is the weak point of the UK, but the lack of unity is the weak point of the EU: the member countries have different interests. Say, if France has a lot of things to share with the UK, fisheries specifically, why would Germany suffer from its neighbor’s disagreement with the British counterpart?

That’s the rough sketch of the situation on the fundamental level. Let’s see the technical part now.

The GBP is obviously shaking.

Against the USD, it went up to 1.35 on good hopes for Brexit success. Then, it went down to almost 1.32 just recently. Currently, it trades below 1.34 – right at the median it’s been at since the end of November.

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Against the EUR, there is a similar expansion of fluctuation, but within an upslope. After EUR/GBP took off from 0.89 on November 25, it never came back down there. Currently, it trades at around 0.9070 after bouncing off the heights above 0.91.   

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Frankly, only now it seems that the GBP traders are “trading the reality” of the British pound. That is, an economic crisis unseen for the last 300 years in the UK (Rishi Sunak’s words), and Brexit about to fall off the cliff to the abyss.

Well, let’s see what Boris Johnson and Ursula von der Leyen come to.

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