Dollar pairs to one degree or another react to US events, tracking the dynamics of the impeachment procedure and statements by the Federal Reserve representatives. However, the pound-dollar pair continues to be in its coordinate system, where Brexit remains a priority topic. This fact needs to be reminded right now, since at the end of the week increased volatility is expected for both the dollar and the British currency. And if the greenback will respond to the results of the US-Chinese negotiations, the pound will be active for completely different reasons. This is the insidious situation: GBP/USD will not follow the dollar index, so the dynamics of this pair may differ from the dynamics of other dollar pairs.
While the financial world awaits the outcome of another round of trade negotiations, the pound is awaiting the EU verdict regarding Boris Johnson's new Brexit proposals. Last weekend, the French president assured the British prime minister that by the end of this week he will agree on a position with his European colleagues. He also noted that negotiations on this issue will intensify in the coming days, after which the team of Michel Barnier will present his assessment of the situation: whether the proposals of the British prime minister comply with the principles of the European Union or not.
Judging by the rhetoric of many EU representatives, the answer to this question will be negative. The backstop problem is still unsolvable: by and large, Brussels requires London to have Northern Ireland within the European customs zone, while this scenario is opposed to both Downing Street and the House of Commons. All alternative proposals are already rejected by representatives of Europe. For three years, the negotiating groups tried to resolve this rebus, but in vain. These or those proposals are blocked either in Brussels, or in the British government, or in the British Parliament. Within the framework of this triangle, the parties need to agree on the notorious back-stop mechanism, however, all previous attempts ended in failure. Therefore, with a high degree of probability, it can be suggested that the current negotiations will end in a similar way.
In fact, the parties continue to stand their ground. In the course of his speech, Boris Johnson once again announced yesterday that he had made a "generous, reasonable and fair" compromise proposal to Brussels and now expects Europeans to take reciprocal steps. In his opinion, the EU should show "political flexibility" by agreeing on the proposed ideas.
However, the EU representatives were mostly skeptical of the plan, which has the code name "Two Borders for Four Years." Many of the provisions of this plan were perceived by the Europeans "with hostility." Firstly, Johnson proposes to give the legislature of Northern Ireland a veto: by and large, local deputies will decide the fate of back-up every 4 years. But at the same time, the deputies of this legislative body themselves cannot hold a single meeting for the past three years, due to the lack of a quorum. Brussels will definitely not endow the Assembly of Northern Ireland with such powerful leverage.
In addition, the British prime minister proposed to organize a "translucent" border between Ireland. According to him, customs checks will return to the island - both on land and at sea - but they will be practically invisible to those crossing the border. Nevertheless, the border is de facto returned, and customs posts, even at a remote distance from the borders, remain customs posts, regardless of their location. This proposal does not suit many politicians - both among Europeans and among the British.
Thus, the probability of a deal based on the plan proposed by Johnson is practically zero. At the same time, one cannot exclude the possibility that Brussels will put forward counter proposals that London will agree to - but given the background to the negotiation process, this option is also unlikely. This means that in the near future the pound will be under strong pressure, as the "hard" Brexit will appear again on the horizon.
If the parties do not agree on the general provisions of the updated deal before the EU summit (which will be held October 17-18), the Johnson government has two options: either apply for a postponement of Brexit, or leave the EU without an agreement, contrary to the legislative decision of the House of Commons. In any case, the pound will be under pressure after the announcement of a negative response from Brussels - in this case, panic will increase in the market regarding the implementation of the hard scenario. In turn, the GBP/USD pair, will resume the downward movement, at least to around 1.2130 (the lower boundary of the Kumo cloud on the daily chart), with the main goal in the area of annual lows (1.1950-1.1980 range).
The material has been provided by InstaForex Company - www.instaforex.com