Sharp British pound fluctuations have occurred today. Thus, the pound sterling dropped by more than 100 pips during the European session and then recovered its lost positions a couple of hours later. It seems that market participants are once again confused about the current Brexit situation and the trade agreement. There are considerable risks of breaking the previous UK-EU trade relations. Moreover, the news about the UK and the EU being unable to manage their differences during the next round of trade negotiations did not add optimism to the market.
All the blame is on the UK Internal Market Bill, which we have been discussing throughout this week. To sum up, the EU wants Britain to withdraw the above mentioned bill, as it partially violates the established provisions of the previous Brexit agreement. Let me remind you that back in early September, the European Union demanded that the UK withdraw this bill since it aimed to prevent an evident border between the Republic of Ireland that really wanted to retain its independence and stay in the EU and Northern Ireland (part of the UK).
This violates the terms of the Withdrawal Agreement reached between the parties at the end of last year. The agreement increased the chances of reaching consensus on a Brexit trade deal. The new bill, however, violates the Withdrawal Agreement and deals primarily with the Irish borders. If the bill is passed, it will invalidate the Brexit provisions that prevent the creation of the border between Northern Ireland and the Republic of Ireland. In fact, this will completely cancel all the efforts which became the basis of the UK-EU trade agreement. In addition, the new bill indicates that the UK will provide support for companies operating on the territory of Ireand, which also sparks outrage in the EU.
However, after such a sharp fall, the pound just as quickly regained its losses. This happened after the President of the European Commission Ursula von der Leyen announced that the EU still wanted to conclude a trade agreement with the United Kingdom, but only if London abandoned the Internal Market Bill, which contradicted international law. This instilled optimism into the markets giving hope that the agreement will be signed at the last moment. The head of the European Commission also said that the UK will receive a formal notification in the near future, which will be the first step towards a legal action over the Internal Market Bill.
As for today's fundamental statistics, the UK released its manufacturing business activity data, which showed a slower pace of growth than initially estimated in September this year. The reading did not put the pair under much pressure. The IHS Markit/CIPS report indicated that the purchasing managers' index for the manufacturing sector was 54.1 points in September against the preliminary estimate of 54.3 points. In August, the index was 55.2 points. Let me remind you that a reading above 50 suggests growth in the sector. Such a slowdown was expected as the large impulse was observed in the summer amid the lifting of quarantine measures. However, the future fate of the manufacturing sector is unknown, especially in the face of another possible lockdown in the UK.
As for the GBP/USD pair, buy deals in the support area of 1.2820 were in the center of attention. Yesterday, the pound started growing from this level. This suggests that the upward correction may continue if certain conditions are met. Thus, if the price breaks through today's high, it will be able to rise to the levels of 1.3000 and 1.3090.
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Meanwhile, the euro is trading around this week's high and has been unable to break it. From a technical point of view, nothing has changed. Only a breakout at the 1.1755 range will increase the attractiveness of risky assets and the price will be able to reach the levels of 1.1800 and 1.1840. The pair will be brought under pressure only if the price drops below the level of 1.1710, leading to an instant sell-off of the euro to the area of 1.1660 and 1.1610 lows.
The eurozone's manufacturing PMI data released today did not affect the euro deeply, as in general, despite some discrepancy with the preliminary values, it remained at the same levels. According to IHS Markit, the final manufacturing PMI in the euro zone remained unchanged in September - 53.7 points versus 51.7 points in August. A reading above 50 indicates an expansion of the manufacturing sector. Germany became the main driver of growth, without which the indicator would have been modest.
Today's data on inflation in France and Italy also did not spark investors' interest, although it turned out to be weaker than expected. According to the report, the French harmonised index of consumer prices in September remained unchanged from the same period last year, while a 0.3% increase was expected. In Italy, inflation plunged by 0.9%, while economists forecast a 0.3% fall. All this indicates the likelihood of a larger decline in inflation in the euro area in September this year.
