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20.08.2019 04:58 PM
GBP/USD. Johnson and Tusk exchanged "courtesies", but the pound is still dangerous to sell

The pound paired with the dollar "plunged" into the 20th figure today, responding to correspondence skirmish of Johnson and Tusk. The parties are, in fact, useless and knowingly losing dialogue that only annoys market participants. London and Brussels will not yield to each other in key issues, and the problem of Brexit at this stage cannot be solved "bloodlessly". By and large, there are only two scenarios: either the prolongation of the negotiation process or the withdrawal of Britain from the EU without any agreements. With the current British Prime Minister and the current composition of the British House of Commons, there are simply no other options. Theresa May's almost three-year attempts to find a common denominator in the triangle "Brussels-British Parliament-Cabinet of Ministers" were unsuccessful – and this fact serves as an additional confirmation of this assumption.

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Today's increased volatility on the GBP/USD pair (after a completely phlegmatic Monday) was provoked by a letter from Boris Johnson to the President of the European Council Donald Tusk. In his written address, he proposed to Brussels to revise the provisions of the agreement already agreed between the European Union and the government of Theresa May – first of all, the part that concerns the issue of the border between Ireland and Northern Ireland.

Johnson reiterated the repeatedly voiced position on backstop – in his opinion, this mechanism is "incompatible with the sovereignty of the United Kingdom as a state." After all, if London agrees to the terms of Brussels, then part of the territory of the UK, in fact, will comply with the rules of the European Customs Union. He also recalled that the British Parliament rejected the proposed deal three times, and the backstop was a key issue in this context. Summing up a fairly lengthy appeal, Johnson urged the Europeans to reconsider this point of the transaction and proposed to the end of the transition period to adopt "alternative agreements" (the essence of which he did not voice), which in the future may become part of the "great trade agreement" between the EU and Britain.

At various stages of the negotiation process, Theresa May have repeatedly proposed similar ideas – but they were rejected, not only by Brussels but also by the British Parliament. Therefore, it is not surprising that the same reaction followed today – at least from the European Union. In particular, the President of the European Council Donald Tusk reiterated that the European Union will not revise the agreement today – including in terms of the backstop. Also, Reuters reporters were able to familiarize themselves with the full text of a written response from the European Council to Johnson. According to insider information, EU member states are "deeply concerned" by the fact that the British Prime Minister offers no concrete alternative as a replacement for the above-mentioned mechanism. Also, the Europeans once again reiterated their unchanged thesis that the EU countries consider the backstop mechanism to be "necessary and legally correct" decision. Although there was nothing new for the market in this correspondence, the pound reacted to this news with a slight decrease – paired with the dollar, it fell to the level of 1.2063.

However, the correspondence skirmish of politicians had a weak impact on the traders of the GBP/USD pair. After a short decline, the pair returned to the borders of the 21st figure, actually freezing in the flat. The voiced idea of Johnson was too predictable, as well as Tusk's reaction – so the fundamental picture for the pound, in general, has not changed. It is obvious that the British Prime Minister makes rather formal proposals to Brussels: having received the same formal response (refusal), he can further defend the idea of "hard" Brexit in Parliament.

All of Johnson's steps are preparatory actions for the main political confrontation, which will begin very soon – in September. That is why the traders of the pair are very skeptical about such letters, appeals, statements. The most important question of Brexit is whether the deputies of the House of Commons will allow Johnson to implement the "hard" scenario or block it, obliging the government to extend the negotiation process with Brussels? This is followed by plot branches (a vote of no confidence, the creation of a government of national unity, early elections, etc.), but initially, there are only two possible options.

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It is worth noting that the Labor leader today called on Jeremy Corbyn to support his supporters the idea of early termination of the parliamentary holidays to prevent the country from leaving the European Union without a deal. And although the political season in Britain officially begins very soon – on September 3 – this fact suggests that the opposition is set to fight Johnson very seriously. Moreover, many centrist conservatives (who have opposed and are opposed to "hard" Brexit) can support their political opponents in such circumstances.

Thus, short positions on the GBP/USD pair look quite risky. Those factors that exerted strong pressure on the pound a few months ago, almost "do not work". Traders are waiting for the main political events of autumn, so they are not in a hurry to open large positions. Today's price dynamics serves as an additional proof of this.

Irina Manzenko,
Analytical expert of InstaForex
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