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Talks between Merkel and Johnson end badly — the sterling tumbles

  • Sterling slides again as talks between UK and German leaders are reported to have derailed the chances of the Brexit current proposal being successful.
  • The fragmenting political landscape continues to prove hard to call and the number of possible scenarios increases on today’s news.
  • Political analysis comes back into play and game-theory mixes with technical analysis as traders look to profit from the extra price volatility.

The currency markets are experiencing increased volatility off the back of Tuesday’s telephone conversation between UK Prime Minister Boris Johnson and German Chancellor Angela Merkel. Reports state that the call has brought an end the EU’s willingness to consider the latest UK proposals for a deal. The permutations of how this might lead to ‘no-deal’ or ‘another deal’ are being considered. However, the fall in GBPUSD shows that the financial markets are now bracing themselves for a disorderly Brexit.

The downward trend in GBPUSD is taking an increasingly steeper gradient and trading volumes are picking up, supporting the argument that this move is well supported.

GBPUSD 15 minute candles — 3rd October – 8th October 2019:

Source: MetaTrader

Midway through the European session, cable is trading at 1.2227 and moving towards breaking the monthly low value of 1.2205.

GBPUSD — One-hour candles — 26th September – 8th October 2019:

Source: MetaTrader

 

Losing ground

Over the last month, sterling has lost ground to all the ‘safe’ currencies. The weakness of GBP against USD, JPY, CHF and EUR signals a move away from what is perceived as a risky currency. The chart provided by specialist forex site PoundSterlingLive.com highlights a 1.5% move in favour of the yen over the last month — despite the Brexit news having been a little more upbeat over that period. The presentation by the UK government of a well thought out counter-proposal, which might clear the UK parliament was last week considered a positive step.

Source: Pound Sterling Live

Reaffirming that a no-deal Brexit is bad news for all concerned, the table of EUR against the G10 currencies over the same time period shows that currency also losing ground to USD, JPY and CHF.

Source: Pound Sterling Live

 

Tuesday could mark the moment that the markets consider the UK’s proposal officially dead in the water. Last week, the initial response from EU negotiators was mixed. Spokespeople form both sides were happy to engage in a good cop/bad cop routine, and although unlikely to succeed, the talks were suggested to carry on for the larger part of the week. The news that the talking has stopped, and so soon, has driven sterling lower.

Analysis by DailyFX.com picks out some of the technical levels that might come into play now that volatility is back at higher levels. Price is moving down, appearing to want to test the moderate daily support (S2) at the ‘round number’ 1.22. But the strong support (S3) at 1.2175 looks like it could come into play. For now, at least, little attention needs to be paid to the resistance levels.

GBP/USD price chart: daily timeframe (February 2019–October 2019):

Sources: Daily FX

 

Game theory

Opinion has been that the EU and UK might spend this week considering the latest UK proposal and identifying any means of using it to form a deal. The time pressures involved are a major factor in play. The need to achieve and execute an agreement by the 31st October deadline is the elephant in the room for the negotiating teams. Even if they were both in full agreement, it would still be touch and go whether they could navigate their respective bureaucratic processes in time.

Source: Pound Sterling Live

 

There is long-term political capital to be gained by being the side of the party that tried to make the deal work. Walking away from the table and increasing the risk of no-deal is not a good look.

The UK government appears keen to clear the decks and prepare for a snap general election. The belief is that making an early break will go down well with UK voters. News reports released by the UK government suggest that Merkel’s position, as explained on Tuesday, is that Northern Ireland needs to be in the EU Customs Union. The UK government references this annexation as a deal-breaker that is sufficient in nature and scale for the UK electorate to consider it appropriate for their government to walk away.

The approach is high-stakes. Will the notes shared by the EU corroborate the UK story? Merkel is considered to be diplomatic to a fault and would have likely tried to avoid such elephant traps. Additionally, it is etiquette that after talks between premiers, each side only passes comment on what their leader said. In the scheme of things, this could be considered a minor discretion, but it’s hard to know what the fallout might be.

 

The voter

If there is to be a general election, a lot depends on the mood of the British public. The political landscape is ever-changing and ‘tactical’ voting could be a significant factor. While it’s not a new phenomenon, the power of technology and in particular social media may take it to a new level. Judging how this influences the overall vote will be a tricky call for analysts.

Reports are that the inability of the political classes to manage the situation effectively is causing discontent among the general population. How this plays out in terms of votes is unclear.

One last hope is that the clear ending of talks means that the EU leaders who meet on 17thOctober could decide to go over the heads of the EU negotiating team in order to strike a deal. The chances of that occurring are slim, as reflected in the fall in the pound.