01.10.202011:55 Forex Analysis & Reviews: Upward trend of the GBP/USD pair

The pound continues to hope for Brexit to end happily. So, traders of the GBP/USD pair actually ignore all the negative and alarming signals that are present in the information space along with declarative optimism. Moreover, looking back at the background of the negotiation process between London and Brussels, we can assume that the parties will bicker more than once before they come to a compromised result. Certain laws have already developed from four years of negotiating, which are repeated from time to time. Of course, such assumptions may not be implemented, but judging by the dynamics of GBP/USD, investors completely exclude a negative scenario.

Yesterday, the British Parliament voted in the third (final) reading for the resonant bill "On the UK Internal Market", which allows for unilateral changes to the Brexit deal. The document was approved by 340 deputies: the same number of parliamentarians supported it in the first and second readings. This suggests that Boris Johnson has loyal supporters in the House of Commons, since the previous Prime Minister, Theresa May, did not have such comfortable conditions. She needed to negotiate not only with allies in the coalition, but also with her party members, among whom there were many oppositionists. On the contrary, Johnson has no such problems (at least for now), and although some Conservative MPs criticized the legislative initiative, the law was still passed.

In this regard, the pound initially reacted negatively, but the price began to rise again after a few hours. We can consider two reasons for this reaction. Firstly, Boris Johnson agreed to give parliamentarians the right to exercise the powers that they will receive after the document becomes law during the consideration of the bill in the House of Commons. Secondly, traders are counting on the pro-European position of the Lords, who will evaluate the bill adopted by the Lower House of Parliament. Indeed, the Conservatives have only 250 supporters (this figure may fluctuate depending on the situation) in the Upper House and more than half a thousand opposition members - Labor supporters. In such a scenario, it is difficult to assume that peers will agree on the bill.

All these factors allowed traders to ignore the fact that the law was passed. However, the situation is not as good and clear as it seems at first glance. On the one hand, Pro-European sentiments do prevail in the House of Lords, so the peers are sure to make their edits to the bill and return it for reconsideration in the House of Commons. But on the other hand, the Upper House of the British Parliament does not have the right to reject bills – the Lords only make their own adjustments, which may or may not be supported by the members of the House of Commons.

In addition, Johnson government recalled a few weeks ago that the Salisbury Convention of 1945 has not yet been canceled, and that this convention "undoubtedly should apply, including to the bill on the UK internal market." According to the provisions of this convention, members of the House of Lords undertake "to pass bills without delay aimed at implementing the election program of the winning party or coalition". At the same time, the conservatives point out that the main provisions of the controversial bill were written in the election Manifesto of the Conservative party, so the Lords are obliged to support the document. However, it is currently unknown whether the peers themselves adhere to this position. But in any case, Boris Johnson has a certain legal trump card here.

Now, let's go back to the bill. It is worth noting that the changes made to it do not save the situation as a whole. It is not so important to Brussels who exactly will have the right to make unilateral changes to the Brexit agreement – the British government or the Parliament. Let me remind you that the EU demanded that the UK abandon the main parts of the bill, while threatening to withdraw from the negotiation process on a trade deal. Given this categorization, the amendments made by the House of Commons should not be viewed as a compromise with Brussels.

In other words, all these optimistic factors from the point of view of GBP/USD buyers have their own issues, which may eventually turn against the pound. But traders prefer to ignore the existing risks, pushing it further above. At the moment, traders highlight only the positive aspects of the information flow. For example, the French Minister for European Affairs, Clement Beaune, announced yesterday that the trade deal is likely to be concluded by the end of November. Due to this, the GBP/USD buyers buy up the British currency. However, we know that such "deadlines" have been set and moved repeatedly since June. Secondly, Beaune added that London is more interested in the deal than Brussels, so the British have to show some flexibility in negotiations.

But despite the pound's growth during the past days, the upward trend of the GBP/USD pair looks more like a "soap bubble", as it is based only on declarative fundamental factors. Therefore, in my opinion, its growth should be seen as a reason to open short positions with the first goal at 1.2750 (the lower limit of the Kumo cloud on the daily chart).