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GBP Hits Back After Round 4, and Pundits Are Smiling!

GBP Hits Back After Round 4, and Pundits Are Smiling!
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October 3, 2017 By: , No Comments

During the latest round of Brexit negotiations, UK Brexit secretary David Davis and his European counterpart Michel Barnier inched closer towards consensus on a host of issues. During the highly anticipated Brexit negotiations, Davis and Barnier shared optimism, but there is clearly daylight between them on key issues. Negotiators hailed the fourth round of talks as more successful, yet the degree to which consensus exists between both sides is up for debate.

On a positive note, EU negotiator Michel Barnier attested to the new dynamic between the UK and the EU, largely a result of the Florence speech by UK Prime Minister Theresa May in September. The European Council (EC) is not quite ready to advance to the next stage of proceedings, given that various components of the extrication process remain in doubt. Barnier offered a semblance of hope during this latest negotiating phase, by admitting to there being sufficient progress on the principles of an orderly withdrawal of the UK from the EU.

 

Brexit Negotiations Continue in Earnest

The take away from the latest Brexit negotiations indicate clearly that the UK and EU are finally moving towards consensus by engaging in robust debate. The negotiations have been taking place since April 2017, when Prime Minister Theresa May invoked Article 50 of the Lisbon Treaty to formally begin Brexit proceedings. Still, there are several issues that remain in play, notably the Northern Irish border, the rights of European Union citizens currently residing in the United Kingdom, and the rights of UK citizens currently residing in the European Union, and a financial settlement between the United Kingdom and the European Union.

The extent to which the European Court of Justice (ECJ) will have authority over EU citizens in the UK is a topic up for discussion. For now, it appears that both parties are working hard to thrash out an agreement. This month, the other 27 European Union countries will assess the talks between the EU and the UK, and determine how to proceed.

One of the leading naysayers in the current Brexit proceedings is the European Parliament. For his part, Brexit secretary David Davis is insistent that widespread progress has been made, to ensure the rights, security and stability of businesses in the UK and the EU, as well as creating greater certainty for EU citizens and permanent residents in the UK, and vice versa. The UK does not want to shirk its financial responsibilities to the EU, and wants to create a blueprint for the extrication process. This is particularly true of Ireland and Northern Ireland. The UK does not wish to be subject to the rule of law imposed upon it by the European Court of Justice.

The EU wishes to make that a core principle of the Brexit negotiations. Negotiators are currently working hard to seek out alternative forms of protection that currently exist under the United Kingdom’s laws. Citizens’ rights are central to the Brexit issue, and the EU wants to ensure that its citizens have full protection, and not only by the UK. Barnier wants the ECJ to be sacrosanct in any Brexit settlement. In terms of financial responsibility, the EU is insisting that the UK continues making contributions through 2019 and 2020, but the UK’s silence on pension payments is worrying.

 

Dollar Strength Pound Weakness

The GBP/USD has meanwhile reversed course after posting slight gains in late September. Disappointing UK PMI data dragged the GBP/USD lower, dropping it to 2-week lows in the region of 1.3270 – 1.3265. According to the latest economic indicators, UK Manufacturing PMI decreased to 55.9 last month, compared to 56.9 in August. This is a clear sign that the UK economy is dragging, with momentum being sucked out of the manufacturing sector owing to Brexit-related pressures.

Other concerns include the probability of an interest rate hike by the Fed on December 13, 2017. This will increase demand for the USD, weakening the GBP/USD pair. Bullish sentiment is pervasive with the USD, and this is further evidence of the 2-week low experienced by the cable recently. The imminent release of ISM Manufacturing PMI in the US could further weaken the GBP/USD currency pair.

What do you feel about the whipsaw movements of the GBP/USD pair, given Brexit negotiations and an imminent Fed rate hike?

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Brett Chatz

About Brett Chatz

Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.

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