24.09.201901:34 Forex Analysis & Reviews: GBP/USD: Johnson still has no clear plan, is it too early to sell the pound?

Great Britain's Boris Johnson has a plan to achieve a new improved deal with the European Union, or is he just leading the country to exit without an agreement?

Last week, European Commission President Jean-Claude Juncker announced Brussels's readiness to abandon the idea of a "back-stop" on the Irish border if the British prime minister offers something new and viable. Against this background, the pound sharply jumped against the US dollar, rising above $1.2570 for the first time since mid-July. However, after Irish Foreign Minister Simon Coveney stated that there was still a lot of disagreement between the United Kingdom and the EU on issues related to Brexit, the GBP/USD pair deviated from two-month highs and the pound gave way to a correction.

Despite the approach of the next Brexit deadline, B. Johnson flatly refuses to ask the EU to prolong the transition period after October 31, which is being forced by local MPs. It would seem that in a hopeless situation, the prime minister maintains good spirits and intends to achieve a deal with the EU.

"Does Johnson have any plan to find a path in the chaos that he helped create?" It is possible that there is. At the last minute, he can bounce back to the center and form a coalition of delighted Tories and Labor in support of a modified version of the same agreement that was proposed by former Prime Minister Theresa May and was rejected three times by Parliament. In this scenario, Johnson may lose part of his right flank, but will receive the support of a sufficient number of Labor deputies and Tory rebels. At this moment, everyone will feel relief, because, finally, it will be possible to avoid a sudden and hard break with the EU. In this case, the main problem for Johnson will be finding a way to save face in the issue of the so-called "backstop". Apparently, he is ready to consider the idea of a common Irish market (at least for agricultural products), provided that the agreed text of the agreement will in no way be an admission that Northern Ireland remains in the common EU market," said the former British Minister of Government Mark Malloch Brown.

"However, many deputies and experts see a man who does not have a plan in Johnson, but an elephant in the Westminster China shop. He himself closed the path to compromise, ignores the decisions of Parliament and quickly rushes either to exit without an agreement or to the fall of his own government. His only lifeboat (if, of course, he manages to get to it) is the general election, which he will try to present as a people against Parliament battle," he added.

According to the Financial Times, the British government is ready to make Northern Ireland a special economic zone in order to avoid border checks with Ireland.

Meanwhile, Arlene Foster, leader of the Democratic Unionist Party of Northern Ireland, announced her readiness to take all decisions of London and Brussels along the Irish border if they do not violate the constitutional status of the region. The softening of the position of the DUP frees Johnson's hands, because otherwise he would lose the support of this party in the early elections.

According to estimates by the Organization for Economic Co-operation and Development, in the event of a disordered Brexit, eurozone GDP will lose 0.5% and British GDP with 2%. As a result, the currency bloc will be on the verge of decline, and Great Britain will plunge into a recession. Responding to such forecasts and Johnson's intentions to withdraw the country from the EU at any cost, market participants got rid of the pound, as a result of which the British currency approached the 2016 lows.

Three years ago, rebounding from the 1.1945-1.1985 area, the GBP/USD pair went up and reached 1.43 in January 2018.

This historical experience allows some investors who believe, if not in the UK-EU deal, then in prolonging the Brexit transition, to keep the pound in their portfolios.

If the "bullish" scenario is realized, then the GBP/USD pair will rise to the area of 1.2575-1.2645, and then to the level of 1.3100.

However, the situation around Brexit remains uncertain, so it is possible that during the fall, the GBP/USD pair will again try to test record lows in the 1.19 area.