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No ‘May Sway’ for GBP with Brexit Deal

British Pounds
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December 6, 2017 By: , No Comments

The GBP/USD pair is currently trading at 1.3418 and looking bullish as 2017 closes out. At the start of the year, the cable was trading at 1.2349, for a $0.10 (to date) appreciation amid bearish macroeconomic conditions. Currency trading experts anticipate that the European Union and the United Kingdom will benefit from an extension to Brexit talks. While Prime Minister May has struggled to convince her European counterparts to agree to favourable terms for Brexit negotiations, both parties believe that additional negotiations are needed to resolve the impasse.

The big winner during these tough talks appears to be sterling. With notable gains against the USD, EUR, and the JPY earlier in the week, speculators are going long on the British currency. There are several sticking points to resolve, notably the status of the Irish border, pension payments to EU workers, and the rights of EU nationals in the UK. With geopolitical factors driving currency movements, it is difficult to assess reasonable value based on fundamentals. FX traders anticipate the trajectory of the GBP will rise heading into 2018.

 

December 14 Rushing up Fast

For FX traders, the mid-December meeting between European Council members will be important for GBP traders. EU leaders will be meeting on Thursday, 14 December to discuss progress vis-à-vis the Brexit deal. Negotiators from the UK and the EU will be meeting in Brussels to find common ground and progress toward the next stage of Brexit talks. Such is the gravity of these discussions that the EC President postponed a trip to the Middle East to hammer out details on a Brexit blueprint. This current round of negotiations has been dubbed ‘Phase 1’ and it paves the way for new discussions in early 2018.

Trader sentiment was buoyed by an announcement from European Commission President Jean-Claude Juncker following his lunch meeting with Prime Minister Theresa May. According to Juncker, ‘… I’m very confident that we will reach an agreement in the course of this week.’ Naturally, sterling rallied on the back of such sentiment, and this could drive sterling towards the 1.37 level against the USD. The ongoing negotiations have broached important issues, and both sides are working hard to resolve sticking points. Brexit secretary David Davis and his EU counterpart, Michel Barnier have already formulated the next phase of discussions between both sides.

 

Bank of America Merrill Lynch Forecasts 1.404 GBP/USD by End of 2018

Bank of America Merrill Lynch

 

The absence of a Brexit agreement will result in a default action – a return to WTO rules. The prospect of a negotiated settlement being reached in 2018 remains slim however, given the complexity of the extrication process and the multitude of trade agreements currently in place between the UK and individual EU countries. Nonetheless, 2018 is likely to be a good year for GBP, with growth prospects continuing albeit at a modest pace. Prior to the Brexit referendum, the cable was trading around 1.48, a level that will require significant bullish sentiment to achieve. Hopes for a transition deal could result in an appreciation of the GBP/USD, beginning with the December 14 meeting.

Global banking giant, BOA has upped projections for the cable to 1.40 by the end of 2018, and it also estimates that the GBP/EUR rate could rise towards 1.18 by the end of next year. Presently, there is no consensus on moving Brexit negotiations forward between UK Prime Minister May and EC president Juncker. Both parties have worked hard to inch closer towards a deal, but agreement remains elusive. Fortunately, the GBP is benefiting from ongoing negotiations, and is moving incrementally higher. Juncker was quoted as saying, ‘I am still confident we can reach agreement before the EU Council meeting on December 14.’

Do you believe that the EU Council meeting will result in an agreement to pave the way for a Brexit plan? How important is the meeting on December 14?

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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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