The British currency collapsed this morning due to the approaching date of the Brexit agreement and lack of progress in negotiations. Previously, investors were rather optimistic about the future of the UK's relations with the European Union. Now, this view seems to be quickly revised.
The GBP/USD exchange rate fell by more than 1.5 percent on Monday morning, below 1.3250, and as a result the bull market which had lasted since September 2020, has been broken quite abruptly. This is when the GBP/USD rate rose from 1.2683 to 1.3540. Last Friday, 4 December, the pound was at the highest level in relation to the US dollar since May 2018. In turn, there seemed to be signals from the currency options market that the agreement on brexit is already priced in. However, recent comments from politicians may contradict that.
EU chief negotiator Michel Barnier said in Brussels that he is not optimistic about the prospects of an agreement with the UK, while Irish Prime Minister Micheal Martin said on Sunday that the chances of an agreement are 50%.
British Prime Minister Boris Johnson and European Commission President Ursula von der Leyen are to review the situation this evening. However, according to "The Sun", the British Prime Minister is ready to withdraw from trade talks with the EU, even within a few hours, which could heat up the already nervous atmosphere even more. The difficult situation can be confirmed by the words of one of the British officials quoted by Bloomberg agency: The talks must show progress by tonight if they are to continue.
With the collapse of the British pound, the euro also weakened. The EUR/USD exchange rate fell from about 1.2140 to 1.2080, while the strengthening of the USD could also lead to a rise in the USD/PLN exchange rate, where the dollar strengthened from 3.67 to 3.71 PLN.
This week may be crucial for the euro, pound and zloty. Negotiations on brexit may contribute to further increased volatility in currency pairs with GBP. The euro, in turn, is waiting for a decision of the European Central Bank and an increase in the bond buying program, possibly also for an intervention related to too high EUR/USD exchange rate, and the zloty, in turn, is waiting for a veto on the EU budget. All this may happen this Thursday and today's events on the pound seem only a prelude to what awaits us at the end of this week.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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