FX.co ★ GBP / USD. Barnier issues Frost a 48-hour ultimatum

GBP / USD. Barnier issues Frost a 48-hour ultimatum

The long-running epic around the Brexit negotiation process resembles a serial soap opera. The storyline of this series is so twisted that traders in four years have not been able to get used to its new scenario twists. On the other hand, the market has become more stress-resistant to various ultimatums and deadlines, which are regularly announced either by Brussels (most often) or by London.

And again it continues to happen at present. The head of the European delegation, Michel Barnier, warned his British counterpart David Frost, on Wednesday, that after the next two days he would abandon further negotiations if the British side did not demonstrate its readiness for compromise solutions. According to him, further negotiations will be meaningless if the UK is not ready to make concessions on the most controversial (and, accordingly, unresolved) issues. Barnier sounded the 48-hour ultimatum via video link, while a face-to-face meeting of the negotiators in London is scheduled for the weekend. Obviously, if the British refuse (even in a veiled form), this visit will not take place.

GBP / USD. Barnier issues Frost a 48-hour ultimatum

In other words, we are now again seeing a storyline under the conditional title "negotiations under threat of failure". Such ultimatums were voiced repeatedly, including by Michel Barnier. But the dialogue was subsequently resumed, even if for some time the parties "for the sake of form" made a forced pause. That is why the pound reacted quite calmly to verbal threats from the European negotiator. At first, the EUR/USD pair sank to the base of the 33rd figure, but then even updated the high of the day, mistaking at 1.3392. During the Asian session on Thursday, bullish sentiment for the pair continued to prevail – buyers of GBP/USD besieged the borders of the 34th price level.

This behavior of investors is explained by the general confidence that a tough scenario will not be implemented: as many traders believe, they will either conclude a trade deal or prolong the transition period at the last moment. According to a number of experts, no one will "shoot themselves in the foot" amid the coronavirus crisis and the slowdown in the global economy. Although both the British and the Europeans do not get tired of repeating that they are ready for all scenarios, including the option of Brexit without a trade agreement.

Meanwhile, the "X-hour" gradually approaches: the transition period formally ends on December 31, which means that the parties have a little more than 30 days left to settle everything that needs to be settled. And the time becomes even less if you take into account the period of the Christmas holidays.

The most ardent opponents of the British in the Brexit negotiations are the French. On Wednesday, the French Foreign Minister once again said that Paris will not give in to the issue of fishing. Recall that the differences here are almost insurmountable. London considers EU's demands to provide access for European fishermen to British fishing areas unacceptable calling it incompatible with the future status of the UK as an independent coastal state. Brussels, in turn, insists on the opposite. Many compromise options were rejected during the negotiations. In particular, London rejected the model of "zonal attachment" (British quota shares depend on the length of stay of fish populations in the waters of the UK).

At the moment, the UK is lobbying for the idea of an annual review (or extension) of the relevant clause of the deal on the issue of fishing. The European Union does not agree to such a scenario, insisting on linking the possible revision of the above paragraph to the entire trade agreement. In other words, if Britain raises the issue of fishing again in the future, other trade rules ratified by the deal may also be reviewed by the parties.

As a result, negotiations on this issue reached an impasse. Plus, Paris accused London of delaying the negotiations - apparently, this is the reason why Michel Barnier (who, by the way, is French) voiced an ultimatum to the British side, giving David Frost 48 hours to resolve the situation.

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GBP / USD. Barnier issues Frost a 48-hour ultimatum

In my opinion, we will see another escalation of relations between Britain and the EU in the near future. The head of the European delegation may indeed cancel his visit to London, thereby provoking panic among GBP/USD traders. But, given the outcome of previous similar situations, we can assume that the pause in the negotiations will be short-lived. Therefore, the pair's corrective pullback can be used as a reason to open long positions. After all, if we take a wider time range (from the beginning of this year), we will see that Britain is gradually softening its position in the field of fishing.

Initially, the British did not even want to discuss any options for the invasion of European fishing vessels in their waters. London then agreed to consider possible compromises. Now Britain is ready to make concessions but under certain conditions. In other words, it remains for the parties to make the final push that will open the way to a trade deal. At the same time, it is hard to imagine that London and Brussels will stop just a few steps from the finish line.

Thus, southern impulse pullbacks for the GBP/USD pair, which are usually emotional in nature, can be used to open longs. The intermediate upward goal is the round mark of 1.3400. The main resistance level is located slightly higher, at 1.3450 - this is the upper line of the Bollinger Bands indicator on the daily chart.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade
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