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17.07.201911:15 Forex Analysis & Reviews: GBP / USD. Johnson pulls pound to the bottom

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Yesterday, the pound-dollar pair updated two-year lows, and already tested the 23rd figure. The last time the price was on such a low was in April 2017, after another surge of concern about the prospects of "hard" Brexit. After more than two years, the fundamental picture for the pair has not changed: chaotic Brexit looms again on the horizon, and the pound follows the panic sentiments of traders.

The devaluation of the British currency paired with the dollar was predictable. Quite good statistics from the USA against the background of pessimistic British prospects strengthened the downward trend, provoking the rapid decline of the pound to multi-year lows. A pair of gpb / usd went up to the next support level of 1.2405 (the bottom line of the Bollinger Bands indicator), pulsed through it, but failed to gain a foothold in the area of the 23rd figure. Now the price naturally moves back, as part of the corrective decline.

Exchange Rates 17.07.2019 analysis

Apparently, this is not the last assault on the 23rd figure. But before we analyze the reasons for the rapid decline of the British, the rate of gbp / usd pair has brought down a combination of two fundamental factors. First, a fairly good report on retail sales was published in the United States. The overall figure, as well as the figure excluding car sales, grew in June by 0.4% (with a decline forecast to 0.1%). Excluding auto and fuel sales, the indicator has been growing for the second month in a row, reaching 0.7%. Against the background of growth of key macroeconomic indicators (Nonfarma, inflation), these figures have provided significant support to the dollar. Greenback went up in price across the entire market, but the brightest growth dynamics was observed in a pair of gbp / usd.

This is due to the fact that with the simultaneous release of American data in Britain, there was a debate between Boris Johnson and Jeremy Hunt. On one hand, politicians have already voiced familiar rhetoric, including the prospects for Brexit. However, traders focused on their comments on the border with Ireland. I note that the issue of the Irish border was the main stumbling block that prevented the approval of the deal under the rule of Theresa May. And today, the situation has been repeated. Both Johnson and Hunt actually voiced an ultimatum: either the European Union is making concessions, or Brexit will follow the "hard" scenario, without a deal.

It is worth recalling here that at the beginning of this year, Theresa May proposed to conclude a separate agreement between Britain and Ireland. In this document, the parties could consolidate the details and terms of the special border regime with Northern Ireland. By and large, it was about those legal guarantees from the EU, which were so long spoken in the walls of the British parliament. But this idea of May did not materialize: the draft of this document did not find support either in the British parliament, or in Brussels, or in Belfast.

Now, the position of British politicians is much tougher. In particular, Johnson, who next week is likely to occupy the post of prime minister, said that there would be no special conditions on the Irish border. He also categorically rejected the insurance plan (the notorious "backstop"), while emphasizing that the five-year transition period will not change anything in essence. Johnson urged to look for "new options", but at the same time, excluded the approval of a transparent border. In general, he had previously criticized backstop, pointing out that this mechanism actually links Britain to EU trade standards. Now, Johnson reiterated his position, being five minutes past the head of the British government.

In turn, for Brussels, the question of the Irish border has the same fundamental strategic importance. Ursula von der Leyen, who, by the way, was elected as president of the European Commission yesterday, reiterated her predecessor's categorical position. According to her, the text of the agreement between London and Brussels is not subject to revision, and now "the ball is on the British side." Given this rhetoric, the British side will find it difficult to convince the EU to resume the negotiation process. And even more so, Europeans are not going to abandon the idea of a transparent border with Northern Ireland, not to mention meeting the other requirements of Boris Johnson.

Exchange Rates 17.07.2019 analysis

All this suggests that in the near future the political confrontation between London and Brussels will increase significantly. According to the British press, the recent negotiations between representatives of Britain and the EU were almost hostile. The British side tried to convince their European colleagues that the existing agreement is politically unviable: it will not be supported by neither the deputies of the House of Commons nor Prime Minister Boris Johnson. Representatives of Brussels in response to this only threw up their hands, repeating the position that there would be no re-review of the transaction.

Thus, until the British Parliament enters the game, the situation will only get worse. Johnson will tighten his rhetoric, Brussels, in turn, to defend the position voiced earlier. The probability of the implementation of the "hard" Brexit will grow with each passing day, putting significant pressure on the pound. All other fundamental factors will play a secondary role. In terms of technology, the pair is near the bottom line of the Bollinger Bands indicator on the daily chart (1.2405). If bears push this target, the next support level will be 1.2350 - this is the bottom line of the Bollinger Bands on the weekly chart.

Irina Manzenko
Analytical expert of InstaForex
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