BREXIT IS BACK & GBP is Falling
GBP has been on the back foot on the first trading day of the week. Weighing on sterling sentiment has been growing reports since the weekend that UK PM Johnson is reluctant to ease lockdown restrictions anytime soon, out of fear of a second wave of the spread of Covid-19 in the UK.
The longer the UK economy is under lockdown, the greater the damage. Meanwhile, a number of European nations are already starting to ease their own lockdowns. This will likely weigh on GBP in the coming weeks.
But there is another thing on the minds of GBP traders today… Brexit!
After the Covid-19 pandemic disrupted the original timeline, negotiations are back on (via teleconference). Talks start today and are set to culminate in a meeting between chief negotiators Michelle Barnier and Stephen Barclay just after midday on Friday.
Discussion regarding a “level playing field” (sticking point number 1) will take place every day this week from Tuesday, while discussions regarding fisheries (sticking point number 2) will start on Wednesday.
As a reminder, the UK position on the level playing field issue is that the UK should not be subject to EU rules, while the EU wants to make sure the UK cannot undercut it on things such as environmental and worker standards (and force it to follow some rules). The UK position on fisheries is effectively “get out of our waters”, while the EU wants to maintain unfettered access.
As things stand, the UK is set to leave the EU on the 31st of December 2020 and has said it will not ask for or accept an extension, despite the EU saying they are open to the idea.
The closer we get to the end of June deadline for an extension to be agreed upon, the more this will weigh on GBP. Traders want the risk of a damaging no deal exit to be taken off of the table as soon as possible.
Most now expect the UK to agree to an extension to the transition period (which needs to be agreed before the end of June) for a few reasons...
1) Lack of time and resources; the previously scheduled round of negotiations back in March were pretty much abandoned as the UK and EU governments scrambled to mobilise their public health & economic response to the pandemic. Moving forward, this is where resources will be prioritised.
2) Even Brexiteers won’t want a WTO exit right now - A no deal end to the transition period (which is widely seen as economically damaging) would be a “nail in the coffin” to the UK economy, which already likely faces its largest recession in nearly 100 years (the BoE sees UK GDP falling as much as 35% in Q2).
3) PM Johnson can get away with it politically - In the past, “capitulating to the EU” (i.e. asking for an extension) was politically damaging for PM May and having a tough line (ala PM Johnson) was politically rewarding. Now, “Brits want a long Brexit extension to deal with coronavirus - including almost half of Leavers”, according to a Focaldata poll.
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