Sterling down on PM's no deal noise

Sterling fell sharply on comments from PM Boris Johnson calling for the UK to prepare for a no-deal exit in January and accusing the EU of not negotiating seriously.

Johnson stressed that a Canada-style free trade deal was all the UK ever wanted, but that it had become clear from the EU summit that this was not acceptable to the other side. He said that the EU had abandoned the idea of a free trade deal and that unless the bloc makes fundamental changes to its approach, the UK will go for no deal.

GBPUSD dropped one big figure, sinking from day highs at 1.2960 to test the Wednesday low at 1.28630 area, which has held for now. 100day SMA at 1.2838 below this is yet to be tested.

After dropping hard cable bounced off the support to reclaim the 21-day SMA at 1.2890 and remains well within the September range, but sentiment will remain fragile with risk of pullbacks on negative headlines. Lots of noise for the day traders to latch on to but no trend emerging. Longs may struggle against this backdrop and a retest of the bottom of the range at 1.27 is a distinct possibility in the near term if today’s support cracks.

What it is

A clearly signposted and choreographed set piece, following in the wake of the Oct 15th deadline, which is designed to force the EU to back down. The UK wants to gain the upper hand in the talks and hopes fissures will open up between member states (Germany and France in particular) and that the EU will eventually crack and go for what the UK is offering.

We knew before these statements that the UK and EU will continue to talk and work towards a deal. Boris wants to talk tough and ramp the no deal rhetoric but it’s for the crowds – talks are ongoing.

What it’s not

It’s not entirely bluff – the UK would through gritted teeth accept a no deal because politically Johnson is taking so much flak over the pandemic that he has no room to ‘let the country down’ over Brexit.

The red/blue wall in the north has been hard hit by the pandemic – they would never vote Tory again if Boris backs down now over Brexit. And it’s pointedly not the UK walking away from trade talks – it’s important to lay blame at the feet of the other and Britain’s position has not materially altered.

Status is unchanged – both sides are working towards a deal and continue to do so. Both sides want a trade deal to be able to sell to voters and ‘move on’. Time is tight but a thin or skinny trade deal ought to be accomplished. An informal meeting of heads of state in Berlin scheduled for Nov 16th may be the crunch point.