Brexit breakthrough is a minefield for GBP
The EU has granted the UK permission to negotiate with it over their future mutual relationship - a development hailed as a breakthrough and a GBP positive. But as the European Commission itself warmed, now it’s the hard part that starts.
Last week was volatile for GBP as it oscillated on the twists and turns of the Brexit talks, but by the end of the week the anticipated breakthrough happened and EUR/GBP breached key support levels around 0.8760 on GBP strength.
Nonetheless, the EU-UK agreement covering the Irish border, the divorce settlement, citizens rights and the role of the European Court of Justice over the UK post Brexit contains enough fudge and ambiguity to set the scene for years of rows, which could sink the hoped for EU-UK free trade deal and could create a fraught relationship. But in the short term it was enough fudge to progress the talks to the next stage.
Take the wording over the Irish border, for instance. To avoid a hard border in Ireland, the fall back position if other options are exhausted is for the UK: “to maintain full alignment with those rules of the internal market and the customs union” (even though the UK is leaving both). The UK also agrees to safeguard the integrity of the EU internal market and the customs union in relation to Ireland.
The UK believes the interpretation of these clauses to be very narrow, unsurprisingly the EU thinks they have broader implications. They could however prove a real constraint on the UK’s ability to negotiate trade deals outside the EU where most of its exports now go and where most the economic potential is.
These clauses could also be the foundation of a future EU-UK trade deal, which will likely focus on physical goods (where the EU has huge trade advantage), but not include services (where the UK has an edge). Also, could safeguarding the integrity of the EU’s internal market mean restricting the UK’s ability to import cheaper goods from outside the EU? (in case they get smuggled across the Irish border).
This is a potential live grenade primed to go off at any moment and could certainly throw a spanner in the works for any GBP rally. Also, if services are excluded from an EU-UK trade deal and the UK remains shackled to EU regulation, then this will be a firm GBP negative long into the future as the UK’s trade deficit with the Union will soar even more.
But then as they say in Europe “nothing is agreed until everything is agreed”. That sentence is one GBP bulls would do well to remember going forward.
TECHNICAL ANALYSIS: EUR/GBP trend changer or status quo?
The breakthrough in EU-UK talks was enough for EURGBP to pierce tough support around 0.8760. But will it be a game/trend changer on the FX markets? Whether the trend’s progress can be built upon will depend on whether the positive political mood music can be maintained over Brexit. The next target would be 0.8660
In the short-term there could be a battle around the 0.8670 level as the bulls and bears slug it out for dominance. The pair bounced off the lower Bollinger band and still remain close to it, suggesting progress could be slow or it may simply have been a false break-out with the pair set to remain a little longer in a range of around 0.8730 to 0.9013.
Resistance can be seen at 0.8830-5, 0.8846, 0.8893 and 0.8928 with support placed around 0.8767, 0.8737, 0.8707 and 0.8687
By Justin Pugsley, Markets Analyst, MahiFX