09.09.202016:20 Forex Analysis & Reviews: GBP to face more challenges

Brexit trade deal is under threat as the UK and the EU have never reached a compromise. The pound sterling remains under great pressure amid the news that Brexit trade negotiations have ended in a stalemate.

The British pound dropped to its lowest level in six weeks against the US dollar on Wednesday. However, the worst is yet to come. The reason for this may be a new legislation prepared by the UK authorities which brings some amendments to the Brexit withdrawal agreement. This step has raised fears that the next round of trade talks with the European Union can be disrupted.

The details of the new legislation will be published later on Wednesday. It has already been announced that the new legislation will break international law in a limited way. This means that in the future the negotiation process on a trade agreement may be put on halt.

The pound sterling has fallen 1.8% against the US dollar over the past few days as the UK steps up preparations for leaving the EU without a deal.

In general, the pound's volatility hit its highest level of 10.4% in the past month and stays almost unchanged in nearly five months.

The British pound is currently trading at $1.2919, its lowest monthly level. Its daily losses have reached 0.3%, which is quite a lot.

Against the euro, the pound traded 90.91.

However, most analysts believe that the pound's downward movement may stop soon. For instance, this Friday, the situation may start to improve. According to experts, the pound's decline was short-term. Further downtrend requires additional bearish factors, and Brexit remains the only negative signal so far. Besides, markets have already priced in this uncertainty around the trade deal. Therefore, this negative driver will gradually lose its steam, and the UK currency will begin to stabilize.

Still, the pound will head towards recovery only when the UK government makes a visible shift in its stance on a no-deal Brexit. The EU position is clear: if the UK breaches its obligations on withdrawal, then there will be no trade agreement. At the same time, the British government assures that it is not going to violate the withdrawal agreement.

In the meantime, the persistent uncertainty around Brexit is undermining investor confidence in the UK authorities. Moreover, this situation casts doubt on their ability to conduct business negotiations and reach trade agreements with other states in the future. The pressure on the country's economy will continue until the two parties come to a consensus. This means that the recession in the UK may deepen, thus making the national currency even more vulnerable.