The pound paired with the dollar came close to the 28th figure yesterday, having grown a total of 600 points over the past week. Such a sharp reversal of the pair is explained by the contrast of the fundamental background: back in September, traders were seriously preparing for the "hard" Brexit, while today there are more or less real chances for a deal - if not at the October EU summit, then at the beginning of next year. But a temporary backlash of several months does not scare investors who have been expecting this event for several years. Negotiations between London and Brussels began in the fall of 2016, and should have been completed before March 29, 2019, but Theresa May was not able to convince members of the British Parliament to support the draft deal agreed with the EU. Boris Johnson is now in a similar situation, however, with some significant differences.
The GBP/USD pair traded flat for most of the day yesterday, and ignored even key UK labor market data. But in the midst of the US session, the pound unexpectedly shot up, updating almost six-month highs by reaching 1.2799. Traders reacted to the publication of the influential British newspaper The Guardian. According to insider sources of the publication, London and Brussels are literally one step away from agreeing on an updated deal. The parties have brought their positions so close that a draft text of the agreement may appear today, October 16.
In other words, traders did indeed have a legitimate hope for a historic deal that would put an end to a period of years of uncertainty. Against such a background, even unconfirmed rumors in this regard provoke strong volatility. But when the first market emotions subsided, a logical question arose: "what's the catch?" After all, just a few weeks ago, the Johnson government and the EU leadership were on opposite sides of the barricades, accusing each other of incompetence. And if the parties found a common denominator, then the negotiators agreed to a certain compromise, and this fact may entail new problems, given the position of the British Parliament under the code name "not one step back."
According to British journalists, London really made significant concessions on the Irish border. First of all, in the field of customs control. According to the concept, the customs border will pass through the Irish Sea, which separates the bulk of Britain from the island of Ireland. In return, Johnson "bargained" for guarantees that the same customs rules would apply in Northern Ireland (which, I recall, is part of the UK), as in the rest of Great Britain.
Some members of the House of Commons had previously stated that they would not approve of the border between the Irish. In particular, the leader of the Democratic Unionist Party, Arlene Foster, said that her political force would not support proposals that would actually "trap" Northern Ireland into the trap of the European Union. According to her, Belfast should not remain within the framework of a single market or the customs union while the rest of the country leaves the regulatory orbit of the EU. In other words, the unionists, who in this composition of the British Parliament are temporary allies of the Conservatives, have already declared their negative position regarding Johnson's deal.
But it is worth noting here that according to the voiced concept, the same customs rules will apply in Northern Ireland as in the whole of Great Britain - and this remark can significantly change the attitude of DUP representatives to the draft deal. Last night, the British press already published information (albeit of an informal nature) that the Unionists would not support Boris Johnson's new deal, "if he makes new concessions regarding Northern Ireland." However, at the moment it is not clear whether we are talking about the already agreed proposals of the British prime minister or those that may still follow.
In other words, Johnson will face a difficult battle within the walls of the House of Commons. Indeed, in September, he lost more than 20 "bayonets" of his party members, expelling them from the party for supporting the Brexit deferral bill. Now I am forced to negotiate not only with the "dissidents", but also with the representatives of the Youth Political Party (or seek support among other political groups in the British Parliament). If Johnson is unable to consolidate the deputies, then he is likely to comply with the law and request Brexit postponement, simultaneously initiating early elections in Parliament.
Thus, the pound will respond to the comments of the most influential members of the House of Commons today, evaluating the prospects for approving the deal. If the statements of the MPs will be mostly negative, the GBP/USD pair will be followed by a significant price pullback, right up to the bottom of the 25th figure. If traders see the "light at the end of the tunnel" again, the pound will still conquer the 28th figure: the nearest resistance level is at 1.2870 (the upper line of the Bollinger Bands indicator on the weekly chart).