Sterling fell back to session lows with a view to the week lows being tested after Brexit talks seem to have gone nowhere. The two sides are still too far apart.
Specifically, the EU wants to agree on fisheries and state aid rules before making progress on anything else. EU demands for a level playing field are non-negotiable if there is to be more than a low-level agreement.
Michel Barnier is not upbeat and whilst reiterating that a deal is possible, he said an agreement seems ‘unlikely’ and is concerned about the state of play.
David Frost, his British counterpart, said talks were useful but little progress had been made. The next round of talks take place the week commencing September 7th.
“Whilst the market was not positioned for a breakthrough this week, it’s getting closer and closer to the crunch point – the longer we go without a deal the more pressure comes onto the pound,” said Neil Wilson, Chief Market Analyst with Markets.com.
The two sides are still a long way from agreement on key terms. “We should note that Barnier as the EU mouthpiece will always be pessimistic right up to the moment a deal is done,” said Wilson. “Nevertheless, on certain fundamental principles it looks as though the chasm is too great to bridge.”
Grappling with the competing concerns of sovereignty (UK) and integrity of the single market (EU) goes to the very heart of the talks. Both sides need to make philosophical compromises before the practical compromises can follow. “This is where I start to become concerned about a big, comprehensive deal being done,” Wilson added.
More volatility in GBP/USD
As we move closer to the end of the year, the prospect of a hard Brexit and the commensurate impact on sterling if there is no deal done amid a pandemic, will certainly focus forex traders’ minds on just how low the GBP can go.
We are seeing more volatility in the GBP/USD pair. There are obviously competing forces at work. Last week’s MCAD crossover still points to lost momentum and near-term weakness despite the throwover this week.
Meanwhile EURUSD has dropped under 1.18 after a weak round of PMIs raised fears about the pace of recovery in the Eurozone and traders are starting to show concern the recent ramp in EUR may be overdone. Net long positioning in EUR has become very stretched and the EURUSD is susceptible to a squeeze lower.
