On Monday, the British currency fell against the US dollar by 1.5% and tested the area below $1.3000, as the Prime Minister of the United Kingdom, Boris Johnson, announced the government's readiness to abandon negotiations with the European Union on a trade deal.
Yesterday's decline in the GBP/USD pair was one of the most significant occurrence after the December parliamentary elections in the UK.
Recall that last Friday, January 31, England officially left the EU, but negotiations on future trade relations between the parties will last until the end of the year.
It is obvious that the pound will be quite shaken in the near future.
According to Neil Jones of Mizuho Bank, the risks associated with the United Kingdom leaving the EU without a deal have reappeared on the agenda, which increases the "bearish" pressure on the pound.
"I think that the fear of the possible consequences of the so-called "hard" Brexit will determine the nearest dynamics of the British currency, " Jones said.
Meanwhile, Brussels has already sent London a sharp response to B. Johnson's statement. At the same time, the chief Brexit negotiator from the EU, Michel Barnier, stressed that the UK will not be able to negotiate favorable terms for itself if it insists on its own rules. Johnson is counting on a Canadian-style agreement with the EU, as it will allow the country to set its own rules.
According to Jeremy Stretch, strategist at CIBC, the British Prime Minister's strong stance on this issue significantly increases the likelihood of England leaving the Alliance without a deal.
"At this stage, the market strongly underestimates this risk," the analyst said.
"B. Johnson's tough stance could jeopardize the already difficult negotiations," he added.
Yesterday, at the opening of trading, the GBP/USD pair fell from 1.3200 to the local low of 1.2978, and then recovered to 1.30.
"Apparently, the reason for the pair's decline was politics. British Prime Minister B. Johnson and EU Chief Negotiator M. Barnier set out their views ahead of the talks on the future relationship between the parties. It became clear that the negotiations would not be easy. The pound may fall below $1.30 over the next one to three months, " Rabobank said.
Meanwhile, there are those who remain optimistic towards the British currency.
"Brexit-related headlines will put pressure on the pound in the coming weeks, however, in the long term, the British currency has a much better chance of recovering. Because of this, I would prefer to bet on the strengthening of the pound, rather than on its decline, " James Binney of State Street Global Advisors said. Binney also predicts that the GBP/USD pair will trade in the range of 1.2800–1.3500.
