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British Prime Minister Theresa may could not inspire traders yesterday: the presented "plan B" was more like a declaration of intent than a strategy for further action. By and large, the prime minister again tried to convince the deputies of the absence of any alternative to the agreement reached. At the same time, at the time of yesterday's evening, the deal itself remained in the same form – May only voiced a few principles that will guide the revision of the agreement. The market clearly expected more productive ideas from the British prime minister, so the pound showed modest growth, "satisfied" with the fact that May did not say anything about the possibility of his resignation and early elections.

But in general, the situation with Brexit remains in limbo. According to some experts, yesterday's speech of the British prime minister says that the European Union categorically refused to revise the key terms of the agreement. Representatives of Brussels said this before, and judging by the rhetoric of May, she could not persuade Europeans to meet her halfway. Let me remind you that earlier in the British press there were rumors that the deputies would approve the deal, but on one condition – if the European Union makes a number of changes to the text of the agreement. Anticipating the reaction of Brussels, May did not voice this option. Similarly, she did not talk about another scenario, which involved the conclusion of a bilateral agreement between Britain and Ireland. Dublin was directly opposed to the idea, and May also seemed unable to persuade her Irish colleagues to accept the proposal.

Exchange Rates 23.01.2019 analysis

Instead of concrete proposals, the prime minister announced only declaratory of the principles which it intends to guide the revision of the deal. First, she said that those EU citizens who work in Britain will be guaranteed "all the necessary rights" – that is, their conditions of stay in the country will not deteriorate. This is a kind of "curtsey" in the direction of Labour, as they lobbied for this issue for quite a long time. Secondly, May promised this week to once again work on the beckstop issue – this time together with the Democratic Unionist Party.

In other words, Theresa May tried to "smooth things over" by promising constructive cooperation with both Labour and representatives of the DUP. The only question is how Brussels will react to their agreed propositions. The key problem here is the backstop.

By and large, the deputies of the British Parliament are concerned about two issues. The first is the absence of any clear time frame for the duration of the backstop mechanism, despite the fact that without the approval of the European Union it is impossible to suspend this regime (according to the current version of the draft deal). The second problem is that part of Britain, in fact, will be forced to obey EU regulations. Both London and Brussels recognize that it will be difficult to resolve this tangle of contradictions.

In particular, the representatives of Poland yesterday proposed to designate a "deadline", that is, to limit the duration of the mechanism to specific time dates (approximately – two or three years). However, Brussels was skeptical of this proposal. According to the chief negotiator of the EU Michel Barnier, the EU is not ready to provide London with such guarantees, and even more so with specific deadlines. The most that the British have to count on is the conclusion of an additional declaration, where the conditions for cooperation between Britain and the EU after Brexit will be indicated. It is unlikely that Theresa May will agree to such a generalized and non-binding document - after all, it will most likely be rejected by the House of Commons.

Thus, Brexit's question hasn't really moved off the ground, despite the reduced likelihood of a "hard" scenario. Although May categorically does not accept the idea of postponing the country's exit from the EU, recent events suggest that no one needs a chaotic Brexit: neither Brussels nor the Parliament nor the government. This fact keeps the pound afloat, although further currency growth is questionable.

For example, today, bulls of the GBP/USD tried to develop success against the background of a strong enough statistics on the growth of the British labor market. The unemployment rate returned again to 4 percent, with a simultaneous increase in wages (to 3.4 per cent). The latest figure has been consistently growing since June last year, supporting "hawkish" rumors about the prospects of monetary policy of the Bank of England. But, despite this fact, the pound was able to go to the 29th figure for only a short period of time. Within two hours after the release, the downward impulse was exhausted, and traders again focused on the prospects of the "divorce process".

Exchange Rates 23.01.2019 analysis

Summarizing the above, it should be noted that now the main political struggle will unfold around the issue of backstop. The pound will react accordingly: if the European Union is ready to compromise, the British will not only gain a foothold in the 29th figure, but will also test the annual highs. Otherwise, the GBP/USD pair will turn down to the first support level of 1.2770 (the average Bollinger Bands line on the daily chart).

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

Performed by Irina Manzenko,
Analytical expert
InstaForex Group © 2007-2019
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