07.09.202013:07 Forex Analysis & Reviews: The pound breaks the contract

Insiders of the Financial Times drives financial markets crazy. First, the tabloid reported that several members of the ECB's Governing Council expressed dissatisfaction with the excessive strengthening of the euro, which brought down the quotes of EUR/USD. Now the media puts investors on notice that Britain is going to abandon the terms of the agreement with the EU reached in the fall of 2019, which collapsed the pound. The truthfulness of this information will be known on September 9-10. In the meantime, the market is selling the main currency pair and GBP/USD on rumors.

Because of the history of the Irish border, Theresa May was forced to resign. Boris Johnson was able to solve the issue on the falling flag with the help of special customs declarations, which allowed Northern Ireland to meet the EU single market rules, and not undermine the sovereignty of the United Kingdom. Then the Financial Times, citing at least three officials, reported that London is preparing legislation on the domestic market, in which filling out declarations will become optional. Moreover, the decision on whether to inform Brussels about state subsidies or not will be made by the business secretary.

What's happening? Is Britain going to take a blow to its reputation by reneging on the previous agreement or is this just a rumor to frighten the EU? If the latter, then it smells like an adventure that can cost the "bulls" for GBP/USD dearly. Ahead of the next round of talks, Boris Johnson said the country would thrive to a large extent even if it failed to strike a deal with the European Union. According to David Frost, London intends to negotiate constructively, however, the position of Brussels may limit progress.

The pound is falling due to bad news on Brexit. In addition to this, MPC members have begun to talk about the gloomy outlook for the economy of the Foggy Albion, which increases the likelihood of a reduction in the repo rate and (or) an expansion of British QE. The associated growth of the Central Bank's balance sheet is a "bearish" factor for the national currency.

Dynamics of the Bank of England's balance sheet and repo rates

Monetary Policy Committee member Michael Saunders said that government support helped support consumer spending, which coincided with the easing of restrictions and a decrease in the number of COVID-19 infections. However, this favorable window will now be closed. Indeed, the Treasury is concerned about the growth of the national debt to more than £2 trillion and is discussing the possibility of raising taxes. Saunders believes that the lack of additional financial assistance may lead to an increase in unemployment to the highest level in half a century, which will increase the likelihood of monetary policy easing.

Thus, rumors of serious problems with Brexit, a slowdown in GDP growth, and the growing risks of QE expansion and (or) a reduction in the repo rate may be the cause for the fall of the pound. Moreover, the "bears" for GBP/USD are recovering due to strong statistics on the US labor market for August and the formation of the "Three Indians" pattern on the daily chart. We sell a pair with targets at 1.31, 1.305, and 1.3.

GBP/USD, the daily chart