The Pound vs. Dollar and Euro Today: Raab and Barnier in Focus

Above: Dominic Raab, the Secretary of State for Exiting the European Union makes his first high-level trip to Brussels on Thursday, July 19. Image © Gov.uk

- Tone adopted by Raab and Barnier could trigger moves in the Pound

- UK's stance on Brexit has hardened following tumultuous week in parliament

- For the Pound-to-Euro exchange rate we will be watching the March 2018 low at 1.1152

- 1.30 is the key psychological level in play for GBP/USD

Following a week of domestic political intrigue focus turns squarely on Brussels where European Union chief negotiator Michel Barnier and the new UK Secretary of State for Exiting the European Union, Dominic Raab, will meet on Thursday as part of ongoing Brexit negotiations.

European Commission Press Officer Daniel Ferrie says Barnier and Raab will meet at 4PM B.S.T. to consider this week’s round of Brexit negotiations.

There will be a short doorstep interview upon arrival, whether or not there will be an official press conference is yet to be communicated. We will be on the lookout for any individual briefings if there is not.

We believe the communications offered by both parties following this meeting could influence movements in Pound Sterling into the weekend.

Pound exchange rates are currently carrying a significant political risk premium with markets increasingly pricing the potential for a 'no deal' Brexit scenario as the UK government are forced to double-down on the defence of their negotiating 'red lines' in the face of a spectacular backlash from Conservative party Brexiteers.

The backlash saw a series of amendments being made to key Brexit-related bills in the UK parliament which ultimately hardens the government's stance.

"Brexiteers within the Conservative Party seem set on digging in their heels to frustrate May’s efforts to negotiate a semi-soft Brexit with frictionless trade in goods between the EU27 and the UK after Brexit. If opposition MPs do not support Conservative remainers in securing a semi-soft Brexit, the UK could slide out of the EU in March 2019 without a deal on its future relationship with the EU27," says Kallum Pickering, Senior Economist with Berenberg Bank in London.

The government had initially been intent on delivering a 'business-friendly' 'softer Brexit' following the high-level Chequers cabinet meeting that sought to provide a single coherent UK approach. This approach was in turn distilled in an official White Paper.

EU negotiator Michel Barnier gave clear hints that the contents of the White Paper were something the EU could work with.

But, we doubt the new 'harder' stance adopted by the government via the amendments to their legislation will be welcomed with any enthusiasm and therefore there is a heightened risk Barnier strikes a decisively negative tone in order to try and force the UK into the soft Brexit the EU desires.

Equally important will be the tone and approach adopted by new UK Brexit Secretary Dominic Raab - how robust will he be in defending the UK's position, is he someone who can push his European counterparts into a deal or will he use the threat of walking away as a tactic?

Looking forward to taking questions from MPs on Brexit this morning, with our excellent Ministerial team @DExEUgov, then off to Brussels to meet Michel Barnier and his team. Time to intensify our negotiations.

— Dominic Raab (@DominicRaab) July 19, 2018

For Sterling, nuances here could matter.

What is not quite so nuanced is the scale of the negative sentiment heaped on the UK currency at present and we therefore believe that the balance of risks for the short-term lie to the upside; any spark of optimism will be jumped on by markets and could spark a relief recovery.

EU Pans UK Response, Door to 'No Deal' Opens Wider

The EU gave the British negotiating team a torrid time at the first presentation of the UK’s white paper on the future relationship during this week’s talks, the Guardian reports ahead of the Raab-Barnier meeting.

Led by Michel Barnier’s deputy, Sabine Weyand, the EU’s team of officials picked apart the most contentious parts of the paper as it was presented by Olly Robbins, Theresa May’s chief Brexit adviser, leading to increased concerns on both sides that a no-deal scenario is moving from possible to likely.

“The white paper is not going to form the basis of the negotiations,” one senior EU diplomat told the Guardian. British government sources, in the wake of the latest talks, admitted growing despair over what they regard as the intransigence of their EU counterparts.

These are concerning developments and we imagine they will form the basis of Barnier's initial response.

Advertisement
Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here

Trends Augur for Further Sterling Losses, but Keep an Eye on Supports

Don't expect any relief-style gains to be sustained however as we would imagine that in the current climate investors will merely use any move higher in Sterling as an opportunity to double-down on fresh bets against the currency.

The trend against both the Dollar and Euro is down for both the short- and medium-term and therefore we would suggest it as being unwise to fight the trend.

For the Pound-to-Euro exchange rate we will be watching the March 2018 low at 1.1152 to see whether it can provide support; the Pound found solid buying interest here back in March and foreign exchange markets have a habit of repeating themselves so look for support sub-1.12 to perhaps offer some relief.

Of course, those with international payment requirements will already be feeling the pain of sub-1.12 exchange rates with our algorithms showing banks to be offering GBP/EUR exchange rates in the 1.0830-1.0911 area while independent specialists are offering rates in the 1.1120 area.

The Pound-to-Dollar exchange rate is certainly in a more obvious downtrend which actually spans short-, medium- and long-term timespans.

The support level eyed at 1.3030-1.30 is a clear objective for some bears and therefore we could see some profit-taking in this vicinity that might offer a modicum of support from a technical perspective.

"Sterling has fallen as much as 2.6% from the July high of 1.3362 and the recent yearly low we saw in June has given way. This leaves us open for a possible move on the lower band of the trend channel. Below here will be confirmed as a solid break of the lows we saw back in October and November 2017 and the 50% daily fib from October 2016 to April 2018," says Michael Baker, an analyst with ETX Capital.

Image courtesy of ETX Capital

Barker says moves lower may see us push to the September 2017 break out zone at 1.3 and then below here we have a 61.8% fib at 1.2772 which sits on the August 2017 low.

Those with international payment requirements will see GBP/USD being quoted in the 1.2620-1.2720 area by their banks while more competitive currency providers should be quoting around 1.2940.

"A certain nervousness can no doubt be felt amongst market participants. As a result hedging against a collapse of Sterling has indeed become more expensive on the market over the past few days. Seen over a longer period of time it still seems very favourable though, in particular compared with price levels seen shortly before the Brexit referendum. That suggests that the market is still completely unprepared for a "political accident" so that the market reaction would be very pronounced in such a case," says Thu Lan Nguyen, an analyst with Commerzbank.

Advertisement
Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here