The unprecedented EU's cooperation proposal allowed the GBP/USD bulls to return the quotations above 1.3
When watching the reaction of the currencies to the news, one might begin to to understand what the market believes. If the negative sentiment causes a modest drop of the asset, and positive news leads to its rapid growth, we can assume that speculators are full of pessimism. The market is dominated by bears who clearly did not like glimpses of light between the clouds. The example of the British pound confirms this hypothesis. As soon as the main negotiator of the EU, Michel Barnier, declared Brussels' readiness to offer London unprecedented cooperation never before offered to a third party, the GBP/USD quotes flew up at the fastest pace since January. Barnier had already said something like that in August. But then the market did not consider the possibility of no deal between the European Union and Britain.
For a long time the pound could not take full advantage of the weakness of the US dollar and for four months in a row fell against the euro because of political risks. Non-profit traders increased their net shorts by $ 1 billion to $ 5.8 billion by the end of the week ending August 21. Goldman Sachs notes that bearish pound bets on the futures market turned out to be the most significant ones since May 2017. Investors priced the no-deal factor in the quotes. Commerce Minister Liam Fox estimated the likelihood of such an outcome at 60%; head of the Bank of England Mark Carney noted that the chances are "unpleasantly high"; and Chancellor Philip Hammond discussed the negative consequences of withdrawing from the European Union without a deal. Even Teresa May's words attempting to reassure markets that there would be no catastrophe in any case, and no deal is better the a bad deal, were perceived as an excuse for sterling sales.
Is it any wonder that Bloomberg experts expect the GBP/USD to drop to the level of 1.2 in case of the unfavorable scenario of events. Some bears do not exclude the pound's peak to $1.1. For example, BofA Merrill Lynch notes that the withdrawal of Britain without a deal will force the central banks of the world to reduce the share of sterling in gold and foreign exchange reserves from the current 4.5% to the historical average of 3.6%. 1 pp is equivalent to sales of £ 100 billion.
Forecasts for the pound if in the case of no deal with the EU
Source: Bloomberg. In my opinion, the improvement of Brussels' relations with London is directly related to the weakening of the pound against the euro by 5.5% since April. Only Michel Barnier's words were able to cool down the EUR/GBP bulls that have become obnoxious lately. Despite the gap, few believe in a complete cessation of trade relations, and given the fact that the EU accounts for about 54% of the exports of the Foggy Albion, devaluation of the pound may increase this figure and contribute to the deterioration of the European Union's foreign trade.
Against the backdrop of moderately positive statistics on Britain, market confidence in the continuation of the cycle of normalization of the Bank of England's monetary policy in November 2019 and the closure of long positions in the US dollar, a reduction in political risks will allow the GBP/USD bulls to continue the attack in the direction of 1.32-1.325. If, of course, the EU does not change its mind in the near future and decide to explain what "unprecedented cooperation" means.