The pound-dollar pair started the trading week with a corrective growth after the strongest downward trend movement. The British dollar paired with the greenback, fell in price last week at the strongest pace since March of this year, when there was a rush around the US currency at the peak of the coronavirus crisis. The pound falls for its own reasons even against the background of a relatively weak dollar this September. The GBP/USD traders have always been sensitive to the topic of Brexit, so recent events have quite rightly provoked volatility in the pair. As of this moment, don't give in to the illusions of the growth of the British currency because too serious tests will be experienced by the pound in the foreseeable future.
The pound updated the almost two-month low reaching at 1.2775 at the start of trading on Monday. The GBP/USD pair began to show corrective growth heading to the middle of the 28th figure against the background of the weakening of the dollar index. A certain logic is unquestionably present here. Falling to two-month lows, the pair attracted buyers who at the end of last week did not risk opening long positions in the run up to the weekend. Secondly, the dollar came to the aid of GBP/USD buyers, which began to lose its positions at the start of trading. This dynamic has affected all dollar pairs, even the pound-dollar pair which is not exempted. The Briton was also helped by today's comments from the Irish foreign Minister. According to him, all recent actions on the part of Johnson should be considered as a kind of negotiating tactic, while in fact Britain is interested in a deal.
In my opinion, traders should not mislead themselves about the current growth of the GBP/USD pair. The main exam for the pound is still ahead, so the pair is expected to experience increased volatility in the near future. Deputies will start today considering a high-profile bill that essentially crosses out one of the points of Brexit in the house of Commons. If this bill gets the support of the British Parliament, the pound will collapse all over the market including the pair with the greenback. If this scenario will be implemented, the GBP/USD pair will be in the area of the 25th figure according to some estimates. The Outlook looks quite realistic given that the pair collapsed by more than 400 points last week on the mere rumors surrounding this bill. Now the political battle will begin within the walls of the British Parliament.
It is worth remembering that the adoption of this document is opposed not only in Brussels and Washington. Many of Johnson's party members also criticized this legislative initiative, saying that this step would undermine the UK's authority in the international arena. Three of the current Prime Minister's predecessors – Theresa May, Tony Blair and John Major have called on Parliament to vote no. Major said without hesitation that the bill dishonor and disrespect the reputation of the UK.
Brussels is absolutely furious: both the head of the European Commission, the head of the European Council and representatives of the European Parliament have spoken out against Johnson's initiative. They emphasize that this is an international Treaty, so London cannot change its terms unilaterally.
Meanwhile, Johnson himself called on members Of the House of Commons last Friday to support his initiative. According to him, he was initially dissatisfied with the Protocol on Northern Ireland which is part of the deal between London and Brussels. So, he decided to supposedly hedge in case the parties could not conclude a trade agreement. The new internal market act will allow Ministers to repeal the above Protocol for trade between Northern Ireland and the rest of the UK. Johnson also accused the European Union of trying to organize a roadblock of the UK. According to him, Brussels can not only set tariffs on goods that are imported from Britain to Northern Ireland but can actually block the transportation of food. At the same time, the blockade of one of the parts of the United Kingdom threatens to "destroy the economic and territorial integrity" of the country.
The British Prime Minister convinced his fellow party members in the House of Commons is an open question. Some prominent conservatives criticize Johnson but others preferred to remain silent, thus preserving the intrigue. The current growth of the pound is also due to the fact that the market hears mainly criticism of the British government. And there seems to be growing confidence among traders that the bill will either be withdrawn or failed in Parliament. It's, because of its resonance and possible consequences. In particular, Brussels has already warned that if it is adopted, Europe will automatically withdraw from negotiations on a trade deal. Some representatives of the EU leadership threatened to court and even sanctions.
For me, the bill will not really pass and will not even pass even to the House of Commons in any case. But previous events (discussion in Parliament, speeches by Johnson's supporters, speech by Johnson himself, etc.) will still put significant pressure on the pound. Therefore, the growth of the GBP/USD pair in the medium term should be considered as a reason to open short positions.
After all, we should not forget that negotiations on a trade deal are actually frozen and the transition period is less than four months away. The parties priority will not have time to agree on all the disputed points of the agreement and Boris Johnson categorically refuses to discuss the issue of extending the transition period. Thus, even if the controversial bill does not become law, the Brexit issue will remain putting pressure on the British currency. The nearest GBP/USD resistance level is located at 1.2940 – this is the upper limit of the Kumo cloud on the daily chart. Either from the current positions or from the above resistance level, you can consider sales with the main target of 1.2775 – this is a four-month low that was reached during the Asian session on Monday.
