The pound continues to lose the positions won last week. The positive mood, which was provoked by the rhetoric of Angela Merkel regarding the prospects of Brexit, is gradually disappearing. The downward rollback of the GBP/USD pair is logical since the pair's growth was due only to emotions. Traders also "missed" the good news, so they even used a ghostly reason for optimism. However, the emotional growth of the currency is transient in any case, unless subsequently confirmed by other fundamental factors. In our case, the pound did not find further support on subsequent comments by European Council President Donald Tusk, which sobered the GBP/USD bulls after which the price returned to the base of the 22nd figure.
Let me remind you that last week the German chancellor surprised market participants with quite peaceful rhetoric, saying that Britain and the EU will nevertheless try in the next 30 days to find an alternative to back-stop. Thereby, this solves the main Brexit problem. In general, Merkel was unusually optimistic about the further relationship between London and Brussels. Earlier, in similar negotiations with Theresa May, she took a much more rigid and uncompromising position. Such a dissonance took the market by surprise as the British currency began to be in demand and the pound/dollar pair tested the middle of the 23rd figure, respectively, updating the three-week price maximum.
Apparently, the problem is that Angela Merkel did not express the consolidated position of the leaders of the European Union. For example, French President Emmanuel Macron, who always had a rather tough stance on Brexit's prospects, was very skeptical of the idea of finding alternative ideas for a backstop. The head of the European Council, Donald Tusk, also "with hostility" took the results of the European voyage of Boris Johnson. He stated that Brussels is ready to listen to the ideas of the British Prime Minister, but only on a condition that "they will be realistic." He also added that Johnson risks entering the story as "Mr. without a deal." In response to this attack, the British prime minister replied that with this approach, it was Tusk who would become "Mr. Brexit without a deal."
The two politicians' close standoff has put pressure on the British currency, as their personal resentment reduces the likelihood of agreeing on a compromise solution - not to mention that Johnson's new ideas about backstop may not be supported by the rest of the EU leaders and/or House of Commons. In other words, the optimism of Angela Merkel was In other words, Angela Merkel's optimism was, to put it mildly, premature, given the background to the issue and the complex mechanism of harmonization. Here, it is worth recalling that Teresa May has been trying for almost three years to find a common denominator in the triangle "Brussels - House of Commons - Cabinet". But in the end, she has failed despite the "creative approach" to solving the problem. In this context, Johnson is much less flexible as a politician, so it is doubtful that he will complete this mission in 30 days.
Amid such bleak prospects, another piece of information has surfaced in the British press that shows Johnson's true intentions. The government correspondence was at the disposal of the journalists, where the prime minister requests Jeffrey Cox, the Attorney General of England and Wales, a legal assessment of the possible suspension of the work of the British Parliament for a five-week period. Johnson expressed his intention to block the House of Commons from September 9 so that deputies would not prevent him from withdrawing the country from the European Union without concluding a deal. This suggests that the British prime minister has little faith in the positive outcome of negotiations with Brussels. In fact, he is actively preparing for a confrontation with deputies of his own parliament. Experts say that Johnson is unlikely to take such radical action against the House of Commons, but the published correspondence could further turn the parliament against the incumbent.
Let me remind you that many members of the House of Commons previously supported Corbin's idea of creating an interim government after a vote of no confidence in Johnson and a prolongation of the negotiation period with the EU. True, most leaders of the political forces did not agree to see Corbin as the head of the government of "national unity" and all of these are subject to political bargaining. I believe that the published government correspondence will only rally the opponents of Boris Johnson. By and large, Deputies of the House of Commons never supported the "hard" Brexit for the most part. Earlier this year, only 160 deputies voted in favor of this option, while 400 deputies voted against it. Since then, the number of "hawks" may have declined but has not increased, many experts said.
Thus, the pound was again under pressure from an external fundamental background. Investors' hopes of a compromise with Brussels are waning, while the likelihood of a "tough" Brexit is growing. Given these circumstances, the GBP/USD pair may return to the base of the 21st figure in the current week. However, caution should be exercised with short positions in this price area. After all, the political season will begin in Britain next week (parliament will return from the holidays), after which the behavior of the pair may become unpredictable.
The material has been provided by InstaForex Company - www.instaforex.com