Pound overplayed as EU half plays along

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By :  ,  Financial Analyst

Sterling surrenders gains after Boris Johnson surrenders to the ‘Surrender Bill’

Sterling was heading for its first weekly gain since the middle of last month. Then it emerged that Prime Minister Boris Johnson, who dubbed the law that prevents a no-deal Brexit “the surrender bill”, had pledged to send a letter to the EU seeking a Brexit extension, if no agreement has been reached by 19th October. It’s superficially good news for a softer Brexit. But on the basis that a further delay also extends damaging economic uncertainty—it’s not the best news at all.

The news nixed chances the pound’s chances of a 0.4% rise against the dollar since Sunday night’s open. Now, GBP/USD heads for a flat week at best. Grounds for blaming the dollar are fairly moot after the mixed jobs report was a mild net positive for the greenback. As such, sterling weakness is a further sign that the advance that peaked at 12-week highs last month overplayed realistic prospects of a deal.

There were already signs of a cool market reception to Johnson’s swing to compromise this week, including reports that he could accept a ‘time-limited’ backstop. The yield on benchmark British government debt is set for a third straight weekly decline as the real money continues to shore up safety buffers. That’s not quite on message with Prime Minister Boris Johnson’s view that his latest formula has laid out a “landing zone” for deal. Its key points are below.

  • Customs declarations on goods transported across the Irish border into the Republic of Ireland from Northern Ireland, instead of two customs unions on either side
  • Electronic declarations avoid the need for physical border-post checks
  • A “very small” number of unavoidable physical checks at “designated locations…anywhere in Ireland or Northern Ireland”
  • Northern Ireland keeps EU single-market rules on regulation of goods

The major concession of a single-market for NI holds the main potential for a breakthrough. Acceptance of the need for an “all island regulatory zone” where physical goods can be checked, and a Border Inspection Post for agricultural, food and animal products, coheres with the EU’s demand for essential checks.

But if there were no ‘buts’, this wouldn’t be Brexit. Chiefly, the lack of a backstop opens the government to the accusation of breaking border commitments. An implied veto for Northern Ireland is also awkward for the EU. Little wonder that the European Parliament has telegraphed “grave concerns”. The European Council President Donald Tusk is “unconvinced”, whilst noting that the EU “remains open”. Ireland’s PM said on Friday that Johnson’s plan “isn’t supported by Northern Ireland”, though he was sure to add that a deal by mid-October is still possible. Chances of an extension have objectively increased.

The pound traded against the euro has been among the most ambiguous markets since Britain’s 2016 referendum, partly because of stuttering eurozone growth. Hence improving signs of a completed a weeks-long consolidation since topping at 93p in August underscore deflating sterling sentiment.

  • EUR/GBP began to base late last month following a decline, within a channel, of some 3.5% beginning on 12th August. That move consolidated around a third of the euro’s ascent between early May and mid-August
  • Since the September bottom, the watch has been on for further signs of weakness. It initially appeared that a break below 88.56p support on Thursday was the signal for resumed slides, but after the rate rapidly swung higher, it now appears that the line, first established as resistance by a lightning-fast up spike on 23rd September, will hold. Note the eradication of the pennant straddling the monthly divide by means of a break out
  • The next euro test is on, with EUR/GBP now heading into the range of potential resistance from spike highs earlier this week
  • Above here would be another indication that sterling is resuming an extended period of malaise. Look to 88.56p for invalidation in support of the pound

EUR/GBP – Hourly

Source: City Index

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