UK offered hope for bespoke deal
Michel Barnier triggered a rally in the pound on Wednesday, offering hope to the UK that a bespoke deal can be agreed on the divorce ahead of the upcoming deadline.
The news earlier in the day had been less positive, with reports suggesting that high level officials are not optimistic of an agreement ahead of the EU summit in the middle of October. This acknowledgement from Barnier that they are prepared to offer a partnership that has never existed with another third country – a significant shift from the previous position that the UK must choose a pre-existing model in any future relationship – suggests the EU is ready to soften its opposition on certain issues in order to speed up negotiations.
While this doesn’t mean the EU’s red lines have changed – in fact he explicitly confirmed that they must be respected, along with the UK’s – it does suggest that more constructive conversations can happen to find a workable solution that suits both sides, should one exist. That’s a big change from the focus on punishing the UK for voting to leave which appears to have been the case for the last two years.
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Traders have responded very positively to these comments, with the pound rising close to 1% and back towards 1.30 against the dollar, from below 1.29 before the comments, and a similar amount against the euro.
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Traders have become very concerned about negotiations in recent months, particularly the increased talk of no deal Brexit and these comments will at least start to alleviate those concerns. There’s still a long way to go but it would appear Theresa May and her teams charm offensive across Europe over the summer may be working.
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Will GBP rally continue?
The pound has made some impressive gains on the back of these comments and is now testing a notable technical level. Not only is 1.30 a key psychological level, as we’ve seen in the past, it’s also been support in recent months and roughly coincides with the top of a longer-term descending channel and 55-day simple moving average.
A break above here could be quite the bullish signal for the pair, particularly in the near-term after what has been a substantial sell-off. With the sell-off of recent months having currently bottomed around the 61.8% retracement of post-Brexit lows and 2018 highs, it’s possible that the future is looking much brighter for the pair. Of course, for this to be the case, these comments from Barnier need to be the start of more positive talks to come and by the looks of it, that’s something that traders are now anticipating.