Decisive and tense moments take place right now as the Brexit divorce is in its final stages. The markets react to every single headline, and no one knows what the ultimate impact on the British Pound will be.
Judging by how the Pound reacted so far to any news regarding a possible deal, one may say that any deal is bullish for the Pound. However, market sentiment may easily change. It is not the first time when the markets moved differently after an event than they did before. Hence, caution is needed when trading the GBP pairs.
What is interesting at this point is that the markets view the Euro as undervalued. Let us not forget that the Euro reflects the Euro area economies, but Brexit will have a negative effect on those economies. Hence, the Euro, just like the Euro area economies, are at risk of being hurt by Brexit.
Key Week for Brexit
At this point, the discussions are on hold due to fisheries. There is a strong divergence between what the U.K. and the E.U. want, and without a solution to it, there will be no deal.
More importantly, the E.U. waits to see if the U.K. will, indeed, break international law. If the U.K. will press ahead and pass the Internal Market and the Finance Bills into law, then the E.U. will be in the impossibility of getting any deal approved by member states.
Most likely, the negotiations will continue even after the end of the transition period. At this point, the danger of escalating is real and financial markets fully reflect it.
Consider the EURGBP – the de-facto currency pair that reflects the ongoing negotiations. This week it opened close to 0.90, jumped a hundred points on Monday, only to retrace the entire move a few hours later.
The feeling is, however, that we come close to the end of the Brexit negotiations. After more than four years since the referendum, it is still difficult for the two parties to find common ground.
One thing is for sure – no matter how the two parties will settle the “divorce,” Brexit weakens Europe on the global stage. On the one hand, there is the United States, Canada, and Mexico, with one of the largest trade deals in the world. On the other hand, there is the RCEP in Asia – the largest trade deal in the world.
What used to be E.U. 27 represented the European alternative to compete on the global stage. That changed the moment the U.K. chose to leave.