No deal Brexit planning hits GBP; FOMC minutes up next

A no deal Brexit is starting to look inevitable.

The pound fell lower in early trade and has remained in the doldrums ever since, as investors search for signs that the EU may be willing to re-negotiate the Irish backstop. Whilst Boris Johnson is due to visit Chancellor Angela Merkel, the chances of the EU ditching the most contested element of the Withdrawal Agreement are slim at best. EU Council President Donald Tusk rebuffed Johnson’s demands to reopen divorce talks on Tuesday. A no deal Brexit is starting to look inevitable.

Traders are focusing on Boris Johnson’s threat of dramatically reducing contact with the EU in 10 to concentrate on no deal preparations. Whilst the realisation that a disorderly Brexit could be just over 70 days away is unnerving pound traders. The base case scenario has been the UK leaving the EU with a deal. This is on the cusp of changing. Barclays today announced that they now see a no deal Brexit and a rate cut as the base case scenario. Surely it is only a matter of time until the BoE change their base case as well?

Without a practical solution to the Irish backstop problem and with MP’s due back from the summer recess at the beginning of September we can expect pound volatility to increase to new levels in the coming weeks. Headline trading is challenging at the best of times, headline trading weeks from Brexit will certainly result in some wild movements.

Whilst the UK economic calendar is light, investors will be looking to FOMC minutes due to be released at 18:00 BST, followed by US PMI data on Thursday and Fed Powell’s speech on Friday. Given the outdated nature of the minutes in light of the recent US - Sino trade dispute escalation and global recession fears, the reaction to the minutes could be limited.

GBP/USD levels to watch:

The pound’s failure to break through $1.22 suggests that bearish momentum could be here for a while longer. Near term support can be seen at $1.2125, prior to $1.21 and $1.2065. On the upside immediate resistance is seen at $1.22, which if cleared could see the pair advance to $1.2250.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.