After months of heavy selling pressure, GBP bulls finally got some reprieve this week as the Pound rallied in response to news that the EU will offer the UK a trade deal. Michael Barnier, the EU’s chief Brexit negotiator said that the deal will be unlike any other ever offered by the EU.
Barnier Offers Hope
Following a meeting with the German foreign minister in Berlin, Barnier told reporters that “We are prepared to offer a partnership with Britain such as has never been with any other third country”. Barnier also added that “We respect Britain’s red lines scrupulously. In return, they must respect what we are.”
Barnier has recently said that the EU is ready to offer the UK its “most ambitious” trade deal ever, though the market had yet to react with much hope. In response to this most recent comments though, it seems the market is happy to take them as a sign that a deal will be done. Barnier has previously said that the only trade agreement model that could be acceptable for the UK was access to the single market as a part of customs unions with the EU. However, Barnier has now said that the Norway model is available if the UK wants to retain access to the EU.
Issues Still Remain Ahead of A Deal
While this is an encouraging development from the EU side, there are still issues within the UK camp linked to the heavy political division seen over recent months. Speaking with French business leaders this week, Theresa May’s unofficial Brexit minister David Lidington said that “With exactly seven months until the end of the article 50 process and less than two months ahead of the October European Council, we face the choice between the pragmatic proposals we are discussing now with the European Commission or no deal”. Lidington also added “I truly feel that we are at a fork in the road. There are trends on both sides of the Channel, both sides of the North Sea, and both sides of the Atlantic that could see us drift apart.”
The relief among GBP traders is palpable given the strong increase recently in the probability of a “no deal” Brexit. GBP has been under growing pressure as talk of such an outcome has become more prominent in both political arenas and the media. With the confluent increase in GBP short exposure, the risk: reward to chasing GBP lower has diminished in recent weeks yet the currency remains sensitive to Brexit developments over other inputs such as data releases and BOE expectations.
While a deal has yet to be formally struck, what is clear from this latest development (and what is boosting GBP) is the signal that the EU is not looking to actively see the UK leave the EU without a deal which makes sense when considering the damage that would be done to the EU economy in the event of such a departure. Indeed, the willingness of both sides to achieve a Withdrawal Deal solution should act as a buffer to the magnitude of “no deal” Brexit risks which are already priced into GBP.
UK Politics in Focus
However, the biggest challenge for the UK now will be the return of a divided parliament following the summer break and the forthcoming Party Conference season. The domestic political division will likely continue to place downward pressure on GBP though with so much gloom already priced in, the better opportunities in GBP are to the upside in response to any further positive Brexit headlines.
The rally in GBP has seen price trading back up to retest the underside of the broken 1.3045 level support. Above here the next hurdle will be the retest of the broken bullish trend line from 2017 lows. Above there the next key level will be the 1.3704 level.