GBP Under Pressure

31 May, 2017

The Brexit negotiation process is one of the focuses of the upcoming UK election. Although the Conservative Party has pledged a smooth and orderly Brexit, Theresa May expressed on Monday evening that she will push for a hard Brexit without any deal than paying a hefty bill for leaving the EU. She expects a fair settlement to be reached between the UK and the EU.

It is inspiring to see the country has a leader with a strong posture. However, if the UK leaves the EU without any deal, then UK trade will be under the WTO (World Trade Organisation) rules where higher tariffs will be imposed on UK products being exported to the single market.

The tariff will likely cause substantial and adverse impacts on some sectors, such as the dairy and agri-food sectors with up to a 40% tariff and the automotive sector with up to a 10% tariff. UK exporters would be forced to either absorb the extra costs themselves or increase their product prices. The latter will result in inflation rising higher.

Labour Party leader Jeremy Corbyn said he would ensure a Brexit deal is made. However, Corbyn appears to have a soft stance on negotiating with the EU. If Labour wins, this uncertainty, and the markets’ disbelief in their ability to negotiate a fair divorce deal, will likely result in a GBP sell off.

If the polls continue to swing in favour of the Labour Party before the election date of June 8th it will likely deepen market concerns on vague post-Brexit political and economic prospects and further weigh on GBP.

There are plenty of complex issues that need to be discussed during the 2-year Brexit negotiation process. The associated Brexit turmoil, the uncertain economic outlook and the Bank of England unlikely to raise rate by end of 2019, will still likely pose downward pressure to GBP prospect.

On Tuesday, GBP/USD bulls retreated after approaching the significant resistance level at 1.2900. On Wednesday, during the early European session, GBP/USD bears are testing the significant support line at 1.2800 again. If the support is broken, we will likely see an extended downtrend. EUR/GBP hit a 3-day high of 0.8738 because of the weakening of GBP.

On Tuesday and Wednesday morning, the dollar index rebounded twice after testing the support line at 97.00. On Tuesday, spot gold rebounded after testing the support line at 1260.

US pending home sales for April will be released at 15:00 BST this afternoon. Be aware that it will likely affect USD and USD crosses.

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