Is GBP/USD Headed For 1.2000?
Market Drivers July 29, 2019
Europe and Asia:
Cable hit fresh two year lows today in early London dealing as the new government of Boris Johnson ramped up its no-deal Brexit rhetoric sending markets into a panic that the UK may fall out of the European Union without any customs deal in place.
GBP/USD dropped to a low of 1.2320 before finding a modicum of support after Dominic Raab, UK foreign secretary, stated that if EU continues to be stubborn then no-deal Brexit was a possibility.
The stumbling block in negotiations is political rather than economic as all the customs terms have been worked out. The issue at large remains the Irish border and EU’s insistence that it continues to be the unfettered access point of open movement of goods and services between Northern Ireland and the Republic of Ireland. Given that this point goes to the very essence of EU unification it’s doubtful that Brussels will compromise on its position.
Although markets are fearing a no-deal outcome, the path to that scenario won’t occur without a general election which will likely be called in September. Most analysts believe that the strong anti-hard Brexit sentiment would prevent Conservatives from winning a majority in Parliament, but that assumption rests on the idea of a spirited opposition which the UK is sorely lacking. UK’s main opposition party, Labor, is led by one of the weakest UK politicians in more than a century and it remains to be seen if Jeremy Corbyn could rally his own troops much less the undecideds to his cause.
Therefore there is a very real risk that through a series of mishaps worthy of a Pink Panther movie, UK could very well spin out of the EU without a deal despite the vast majority of the populace opposing such an outcome.
For now, cable hovers near its two-year lows, but if the market begins to truly believe that a no-deal Brexit will become a reality 1.2000 on GBP/USD will give way before the summer’s end.