Image: Brexit chess suggesting the relationship between the U.K and the E.U.
Some currency strategists have begun making positive affirmations regarding the evolution of the Pound Sterling in anticipation of further advances for the British currency in the coming weeks and months.
Why Do These Analysts Believe in a Positive Evolution for the British Pound?
News from over the weekend that the U.K. and the European Commission have reached an arrangement on key future trade agreements caused a spike in the Pound versus rival currencies, with the GBP/USD jumping above the 1.2900 level on Thursday.
The pair came off its highs in Friday’s light trading action but remains above the 1.2700 level. If the British Pound falls under this level the currency could follow a downtrend, according to Westpac analysts.
The pullback Friday was an expected reaction to an EU summit that could have implications to the Brexit deal.
The summit occurred on Sunday and had European Union leaders reviewing agreements made by the European Commission in the Brexit negotiations. As expected they agreed to the Brexit deal as it currently stands and chose to sign off on the declaration of withdrawal.
Such a sign-off from leaders is a strongly positive sign that the Brexit deal is nearing a final approval. It has also calmed investors over the potential for a “no-deal” Brexit.
Another possible outcome of European Union leaders signing off on the current political declaration is allowing the U.K. Parliamentarians who were opposing the deal put forth by Prime Minister Theresa May a chance to reverse their stance. Even though they might still be opposing May’s vision of the Brexit agreement, they are expected to back the deal simply to avoid a “no-deal” Brexit.
What Are the Concerns for the Pound Sterling?
Image: Concept image of UK’s Brexit.
The biggest concern for the Pound, and for currency traders, is whether the U.K. government can get a Brexit agreement passed through Parliament in time for it to come into force by the March 2019 deadline. If that can happen the U.K. will effectively avoid the feared ‘hard’ Brexit.
One of the key provisions that was hammered out in the current prospective deal is the inclusion of wording that would set both sides to finding any necessary alternative arrangements to avoid the hard border on the island of Ireland. This is a necessary inclusion since it will lower the chance of a controversial backstop arrangement being needed.
The backstop arrangement is a type of insurance policy for the U.K. that would allow it to remain in a customs union with the EU if negotiators find it impossible to come up with a solution to the hard border in Ireland. The backstop has been roundly criticized by both sides of the political spectrum as a way to keep the U.K. indefinitely in a customs union. The current declaration has eased concerns of this actually occurring.
Based on the wording in the declaration the EU has become more willing than in the past to accept alternative solutions, particularly those that include technological components.
Therefore, the outlook for the Pound heading forward is now more positive based on the EU response to the political declaration. The subsequent response from the British Parliament is also awaited by traders.
Ultimately the passage of this declaration is the first step toward a successful Brexit deal, which would likely begin a prolonged move higher for the Pound. The base expectation for the GBP/USD in such a scenario would be the 1.4400 level that was hit last April when it looked as if a Brexit deal was close to being signed. Beyond that the pair could continue to levels last seen prior to the historic Brexit vote.
Could the Pound Follow a Downtrend in the Next Period?
Image: Trading chart concept regarding the possible evolution of the GBP/USD currency pair.
While the upside potential for the Pound is real, there are some very real risks that have been identified:
1. After getting past EU leaders, the declaration may come under fire from the hard-line Brexit factions, which would kill hopes for the U.K. Parliament to support and pass the deal, even though it promises to avoid a “no-deal” Brexit.
2. The uncertainty surrounding any potential Brexit deals, and the Pound in general could lead to additional risks being triggered.
3. Independent U.S. dollar strength may also be a risk for the GBP/USD pair. The rising interest rates in the U.S. will continue to add strength to the USD and the U.S.-China trade tensions have also been positive for the USD.
Keeping an Eye on Future Developments for the British Pound
There is a real chance at this point we could be on the cusp of a Brexit agreement that will send the Pound back to levels last seen pre-Brexit. There’s also a chance of continued volatility that will require traders to trade cautiously.
Sources: Poundsterlinglive.com and Seekingalpha.com.
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