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23.05.2019 12:52 AM
The pound is in a steep dive: the draft deal with the EU is doomed to failure

Today, the pound/dollar pair has updated its annual low, dropping to 1.2623. The last time the price was at such a low was in January of this year, when the British Parliament for the second time rejected May's proposed deal with the EU. Back then the pair collapsed impulsively to the level of 1.2670, after which it almost immediately (within a week) recovered in the region of 30 figures. Therefore, today's decline can be considered an annual anti-record: the price has dropped only in December last year (1.2436), and before that - in 2017, when, against the background of failed negotiations with the EU, the pound was trading in the area of 23-24 figures.

The current price dynamics is also explained by Theresa May's failure: her presentation of the "renewed" Brexit deal failed miserably, despite an attempt to please the main political forces in Parliament. Even a tempting (at first glance) proposal to hold a vote for a repeat referendum was received coolly by the House of Commons. This is understandable, because in exchange, May demanded that the agreement be approved on first reading, which is absolutely unacceptable both for Labour and for some of the Conservatives, not to mention the Unionists. "The old deal in a new packaging" - as described by the leader of the Labour Party, Jeremy Corbyn in yesterday's speech in Parliament. According to him, the prime minister, in fact, voiced the same proposals that were already discussed during the inter-party negotiations, which ended in late April with complete failure. All the main points of the deal relating to market regulation, customs union issues and consumer protection remained intact.

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Therefore, Laborites did not go in the wake of the cabinet ministers and refused to support the deal - even in exchange for the promised vote to hold a new referendum. Indeed, it is one thing to achieve a vote on this issue, but finding supporters of this idea is a completely different matter. Here it is worth recalling the March events, when the deputies of the House of Commons held an indicative vote, the results of which were not obligatory for execution — its results only made it possible for us to understand what moods were hovering among British MPs.

So, among the 8 proposed deals there was also the "M" variant, which implies a repeated referendum on the country's withdrawal from the EU. This initiative was supported by 268 MPs, while 295 were against it. Previously, such ideas were also categorically rejected by the House of Commons, with a much larger margin of votes. In other words, supporters of the repeated referendum do not have any certainty that if they exchange their votes for putting this question to the vote, they will get the desired result. Therefore, the Labour Party made a predictable political decision - they stepped aside and took a wait-and-see attitude.

But the battles inside the Conservative Party continue. After yesterday's failure, many party members of May again called on her to resign. According to the British press, earlier she promised members of the "1922 Committee" that in any case, she would leave her post at the beginning of the summer, regardless of the outcome of the vote. But if the fourth attempt to push the deal through the millstones of the House of Commons again ends in defeat, its political fate will in any case be predetermined.

Thus, the pound is plummeting for two interrelated reasons. First, the "renewed" deal was received coolly by the House of Commons: some deputies did not see anything new there, others saw absolutely unacceptable ideas. As a result, the draft deal did not find new supporters, but lost many of the "fans" who supported May in January. All this suggests that the June vote will repeat the fate of the January vote - with all the ensuing consequences. The consequences will not keep you waiting: Boris Johnson, a supporter of the most severe version of Brexit, continues to be a favorite of the political struggle for the chair of the British government. According to most analysts, his coming to power will open the way to the implementation of a hard "divorce process" scenario with the EU. Actually, the hypothetical (but very likely) victory of Johnson is the second reason why the pound swoops down. Traders currently do not see any alternatives to this scenario, so they are actively getting rid of the British currency.

Good data on inflation in the UK also did not add to the pound's appeal. On the one hand, the consumer price index has grown - both in annual (2.1%) and in monthly (0.6%) terms. However, experts expected a more substantial increase (0.7% and 2.2% respectively), so the release did not support the GBP/USD pair. Core inflation remained at 1.8% - at this level, the indicator has been released since February of this year (while analysts had expected growth to 1.9% in April). An ambiguous impression of the release was compensated by the retail price index, which jumped from a zero level to 1% in monthly terms, and grew up to 3% at an annualized rate, updating the 4-month high.

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However, macroeconomic statistics remain in the shadow of political battles. According to rumors, Theresa May can already resign this weekend, if the ongoing backstage talks with deputies end in nothing (which is quite likely). In this case, all the attention of GBP/USD traders will focus on the rhetoric of Boris Johnson, who is likely to head the cabinet after the inner-party elections. If he again accepts the likelihood of a hard Brexit, the pound against the dollar will drop to at least the 24th figure (the bottom line of the Bollinger Bands indicator on the monthly chart). In all other cases, the GBP/USD pair can quickly restore its position in the hope of a new round of negotiation process with Brussels.

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