The pound soared more than 100 points against the dollar today thanks to optimistic rumors about the outlook for Brexit, as well as encouraging comments from Bank of England member Dave Ramsden regarding the outlook for a negative rate. This set of fundamental factors made it possible for the pound to demonstrate impulsive growth and return to the area of the 28th figure. And yet, despite such a powerful breakout, it must be treated with extreme caution. Sometimes the market sees and hears exactly what it wants to see and hear, leaving out many conflicting nuances. In my opinion, this is exactly the case: traders simply ignore the alarming signals, which in no case should be overlooked.
All optimistic comments and statements (which is why the pound grew) are declarative. The fact is that another round of talks began between London and Brussels today, on the eve of which the parties "wished each other good luck" as if before a football match. Thus, the chief negotiator from Great Britain, Michael Gove, expressed confidence that the trade deal would still be concluded, while representatives of the European side expressed hope for a compromise solution. In unofficial comments, British representatives told reporters that London could conclude a trade agreement with the European Union by the end of October, that is, before the EU summit. As a fallback, British diplomats admit the extension of the transition period by several months. According to them, no one discounts this scenario, despite the fact that Prime Minister Boris Johnson excludes such a scenario in the public plane. But, according to the GBP/USD bulls, the head of the British government is bluffing - just like last year during the negotiations on the main deal.
Actually, the pound's growth is based on this. Traders drew attention to the unexpected preliminary optimism of the negotiators and to some insider information, which, however, are also declarative. None of the representatives of the parties announced that they were ready to make significant concessions in order to work out a compromise solution. Here you can recall dozens of similar situations in past years, when the parties, figuratively speaking, began for health and ended for peace. We can not explain why Gove and Barnier are optimistic. And this fact should at least alert market participants.
Moreover, the Deputy Chairman of the European Commission Maros Sefchovich also assessed the prospects of Brexit. His comments were not so optimistic. In particular, he said that London's position in the negotiations "is very, very far from what the European Union can accept." He also mentioned the controversial draft on the UK Internal Market Bill. Shefchovic stressed that this document constitutes "an extremely serious violation of the Brexit agreement." He warned that this would entail a chain of political events that would not be in Britain's favor.
By the way, the bill will be a part of the House of Commons's agenda tomorrow (September 29). The MPs are planning to vote for it in the second reading. MPs are expected to support it, despite a barrage of criticism from both Labour and some Conservatives, as well as from the international community. In their opinion, Johnson's initiative violates international law and destroys the compromise between Britain and the EU regarding customs procedures on the border of Northern Ireland and the Republic of Ireland. In turn, the head of the British government continues to insist that the said bill is a "safety net" if Britain and the EU are unable to conclude a trade deal. And many Conservative MPs agree with the position of the Cabinet of Ministers. Let me remind you that 340 MPs voted for the bill in the first reading.
On the one hand, tomorrow's "approval" vote is quite expected. In addition, according to rumors, MPs will not vote for this document in the third (final) reading until the EU summit. On the other hand, tomorrow's events in the House of Commons could turn the GBP/USD pair 180 degrees, as the Parliament will demonstrate its decisiveness in this painful issue for Brussels. It is also worth considering that the voting will take place during the negotiation process - the head of the European delegation will probably comment on the situation, and certainly not in a positive way.
Therefore, the optimism of investors regarding the prospects for the negotiation process looks at least premature. According to Gove, the British side has submitted proposals for fishing waters and subsidies. At the same time, he warned in advance that there are "significant differences" between the parties. The European side also very veiledly voiced its optimistic hopes - we did not hear any specifics.
All this suggests that pound's growth is not based on reinforced fundamentals. In my opinion, the impulsive growth should either be ignored or used as a short entry. If the negotiators do not "feed" traders' interest in the pound in the near future, the GBP/USD pair will decline at least to the level of today's opening, that is, to 1.2750 (here also the lower border of the Kumo cloud on the daily chart). This target can be viewed as an initial bearish target.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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