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British Pound Scales New Highs after Boris Johnson Said to Soften 'Red Lines', but Buyer Beware...

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- GBP boosted by speculation of Gov shift on Northern Irish backstop.

- UK Gov said to eye separate rules for Norther Ireland in Brexit plan.

- Price action suggests markets see plan as movement on red lines.

- But plan enables 'hard Brexit', out of single market and customs union.

- TD Securities says time to sell GBP again but the charts point higher. 

- GBP shares in market optimism over the U.S.-China trade outlook.

Sterling advanced against all major rivals Friday after being boosted by speculation suggesting the British government could be softening its red lines on the so-called Northern Irish backstop in pursuit of an amicable exit agreement with the EU ahead of an October 31 deadline.

The Pound was higher as investors speculated the UK government might be open to some form of regulatory and legal divergence between Great Britain and Northern Ireland, following a report from The Times claiming Prime Minister Boris Johnson is contemplating such a move in order to improve his prospects of securing a deal after opposition MPs and Conservative Party rebels tied his hands in the negotiations earlier this month.

Further reports suggesting Johnson will travel to Luxembourg to meet European Commission chief Jean-Claude Juncker may have fueled speculation that a change in the government's stance on the Brexit process is afoot. 

The Pound-to-Euro rate rose 110 points to 1.1253 during the session, its largest intraday gain since early August, while the Pound-to-Dollar rallied more than 130 points to trade above 1.2470. The latter is now facing technical obstacles on the charts that some say could ultimately bar the path higher for now. 

"Sterling finally found buyers as the chances of a no-deal Brexit receded somewhat. There's lot of uncertainty still, and EUR/GBP is still basically gyrating between pricing in a hard and a soft Brexit," says Kit Juckes, chief FX strategist at Societe Generale. 

"GBP rises and falls in near-lock step with no deal exit risk on a day to day basis. We expect this to remain the case going forward and all of the incoming news should be seen through the conduit of whether it causes this probability to rise or fall," says Adam Cole, chief FX strategist at RBC Capital Markets.

Above: Pound Sterling performance Vs rivals at the London close Friday 13, September.

Under the mooted plan Northern Ireland would become subject to EU rules for 'agri-food' after Brexit, which would require a stronger de facto border down the Irish Sea than exists currently for reasons of 'biosecurity' and to satisfy international rules. The Times also says Northern Ireland might remain subject to EU rules in relation to the goods trade, which casts Johnson's purported plan in a similar light to the so-called 'Chequers' proposal of Theresa May. 

Democratic Unionist Party leader Arlene Foster has poured cold water all over The Times' story which comes after The Telegraph reported a similar plan was under consideration, although the latter is one where an "all-Ireland" agricultural zone is created along with a stronger border in the Irish Sea, but where the province remains tied to the UK on customs and external tariffs. Republic of Ireland Prime Minister Leo Varadkar says the two sides remain "far apart". 

"The scheme would only apply to health and regulatory checks, rather than tariffs, but would nevertheless create a border in the Irish Sea for agricultural goods passing between Northern Ireland and mainland Britain. The DUP is understood to have been receptive to the idea, which would
 potentially expand on the current health checks on livestock that are made when animals cross the Irish Sea, but insisted there must be no divergence in tariffs," - The Telegraph. 

The difference between the two stories may appear minor but there is a gulf between them in terms of political implications. With UK rules on agriculture potentially set to diverge from those of the EU as time goes by, some veterinary checks on live animals and inspections of plant life passing back and forth were always going to be necessary. Johnson's plan would prevent those checks creating a 'hard border' in Northern Ireland.

Above: Pound-to-Euro rate shown at hourly intervals.

"With Parliament suspended, the ongoing Brexit debacle has moved on to a new phase - one where probabilities favour further GBP-negative headlines from Government ministers. As a result, sterling's moderate rebound in recent days may be nearing its end as the good news from Parliament's exclusion of a No-Deal crash out now looks fully in the price. With an eye on resistance around 1.2382 ahead of the 1.2500 pivot, this returns us into more of a sell-on-rallies posture," says Ned Rumpeltin, European head of FX strategy at TD Securities.

Johnson's gambit as reported by The Telegraph would resolve one of the key impediments to an amicable exit agreement with the EU. However, the UK government would still need to devise a way for the two parties to carry out customs-related inspections away from the Northern Irish border and in a manner that satisfies EU demands that its single market not be infringed by arrangements resulting from the Brexit process. 

The latter is an apparent impossibility because both the UK and EU would need to have some form of checks 'down the Irish Sea' and at Calais if the current interpretation of the Good Friday Agreement is to be respected and the UK regain independence from the EU on trade policy and goods regulations. And the plan reported by The Telegraph is not one that leads to acceptance of the 'backstop', nor is it necessarily conducive to UK or Northern Ireland membership of the customs union or single market. 

Above: Pound-to-Dollar rate shown at hourly intervals.

"The UK is still wrestling with enormous Brexit-related political uncertainty as competing political factions advocate different visions of the UK’s future. Sterling’s near-term path twists with the anticipated solution to Brexit," says Daniel Been, head of FX strategy at ANZ.

In sum, Friday's headlines are unlikely to mean that a 'softer' form of Brexit or softening of 'red lines' around the exit are in the Johnson cabinet's pipeline, and so the recently-reduced risk of a 'no deal' Brexit has not necessarily been compressed any further. That could mean the rally seen in Pound Sterling on Friday is destined to end in tears for investors and traders, which would vindicate TD Securities for having recommended selling the Pound on any spikes higher over the coming days and weeks. 

Speculation in the press also suggested Friday that Johnson is under pressure from his own cabinet to request a third delay to the Brexit process, in breach of his "do or die" pledge not to, in order to keep opposition leader Jeremy Corbyn out of 10 Downing Street. Johnson has claimed he won't request another delay, even after opposition and some Conservative MPs hijacked parliament and passed a law requiring him to seek a delay no later than October 19 if a deal with the EU isn't done by then.

Above: Pound-to-Dollar rate shown at daily intervals.

Meanwhile the Speaker in the House of Commons John Bercow, a Conservative Party MP who's "creative interpretation" of the constitutional rulebook has been indispensible to anti-Brexit MPs, was threatening to further cast aside convention in order to frustrate the government's efforts on Brexit. Bercow said this month he will step down in October, following months of controversial maneuvres against the government.

Most analysts agree the ebbing and flowing probability of a 'no deal' Brexit is the main driver of Pound Sterling exchange rates at present and some say the threat is "underpriced" by the market but technical analysts studying trends and momentum on the charts tip the British currency to rise further in the days ahead. Commerzbank says the Pound-Dollar rate could soon reach 1.25 and the Pound-Euro rate might hit 1.1371.

"GBP/USD’s advance from its current September low at 1.1958 continues to have the May and June lows at 1.2506/59 in its sights. Between these levels and the mid-July high at 1.2580 the cross may struggle short-term," says Axel Rudolph, a technical analyst at Commerzbank. "EUR/GBP so far remains above the July and current September lows at .8904/.8885 which represent key support. Failure at the .8885 level and the June 20 low at .8872 would make us medium-term bearish and target the 61.8% Fibonacci retracement of the May-to-August advance at .8794."

Above: Pound-to-Euro rate shown at daily intervals.

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