The pound is the main outsider in the currency market today, which is actively losing its positions throughout the market. This is caused not only by the new strain of COVID-19, but also by another failure in negotiations around the Brexit prospects. The combination of these fundamental factors put the strongest pressure on the British currency. The new trading week began for GBP/USD traders with both a downward gap and a rally. Overall, the pair has lost almost 300 pips so far, relative to Friday's high. And judging by the dynamics of the downward movement, the pair will be at the bottom of the 32nd figure today, although it tested the limits of the 36th price level last Friday. Such a mood change is quite justified, given the current fundamental picture.
Let's start with the Brexit issue. Yesterday, the next deadline for concluding a trade deal was disrupted: the parties could not come to a compromise solution on the key (and in fact, the only remaining) issue regarding the rules of fishing. Although the negotiators agreed to extend the negotiation process, yesterday's deadline was particularly important in the context of future prospects. The fact is that last week, the EU expressed its readiness to organize an extraordinary plenary session (this is not a quick process, especially amid quarantine restrictions) before this year ends, if a compromise is reached before 00:00 on Sunday. However, after it became known that the parties could not agree before the designated deadline, the European Parliament said that deputies will not be able to approve the deal this year, even if the negotiators compromise this week.
To simply put, London and Brussels will not have time to ratify the deal before the end of the transition period. Now, politicians need to think not only about how to reach a compromise on key points of the deal, but also how to get out from the legal impasse in which they are in. Some MEPs say that if the agreement is reached before the end of the year, it can be applied under a "special temporary procedure" from January 1, while the European Parliament will ratify the deal in the second half of next month. A separate meeting on this issue will be held today, where various options for breaking the deadlock will be discussed.
However, legal maneuvers may not be useful, since the parties still cannot resolve the most complex and controversial issue on fisheries. According to Reuters' news agency sources in the UK government, London will not agree to a deal that leaves the country in control of its own laws or waters. Downing Street confirmed that negotiations are continuing, but if Brussels does not change its position, then the country will leave the EU on the terms of the World Trade Organization on December 31. An unnamed source of journalists noted that Boris Johnson is not bluffing and is seriously ready to take such a risky step for the country.
However, it is still a rhetorical question whether the British Prime Minister is bluffing or is he really ready to leave Britain on WTO terms. In fact, negotiations was stalled, although there are only 10 days left until the end of the transition period. At the same time, the European Parliament will not have time to ratify the deal in any case, even if the parties can unravel the tangle of controversial issues. All these circumstances put a lot of pressure on the pound, especially amid the panic about a new strain of COVID-19.
Britain's Ministry of Health has already reported that the situation with the mutated strain is actually out of control, as it spreads too quickly. According to preliminary estimates, it is 70% more infectious than usual, so quarantine measures did not bring any results in those regions of England where it was detected. The number of COVID-19 cases in the country rose by almost 36,000 on Sunday, which was twice the value a week ago. In this regard, flights to the UK were canceled by France, Austria, the Netherlands, Bulgaria, Germany, Ireland, Sweden, Turkey, Saudi Arabia, Israel, Iran, El Salvador and Colombia. Brussels, in turn, is also expected to completely isolate the EU from this country today.
Meanwhile, Downing Street will analyze the current situation. On the one hand, the Ministry of Health and the Ministry of Transport urged carriers to cancel trips to British ports, which are located in the south of the country (the focus of the new coronavirus was discovered there). On the other hand, many British companies are now actively accumulating inventories, considering the possible implementation of a no-deal Brexit from January 1, 2021. This is because Boris Johnson refuses to initiate the issue of extending the transition period, although the Scots, represented by the First Minister of Scotland, Nicola Sturgeon, officially asked him to do so.
Moreover, it became known that the British authorities decided yesterday to introduce the most tightened restrictive measures on the movement of residents of London and almost the entire Southeast of England. Experts believe that B. Johnson will have to introduce a nationwide lockdown in the near future, due to his late reaction to the threat of a new COVID-19 strain.
As a result, the pound's fundamental background is quite gloomy. Even if Mr. Johnson decides to extend the transition period, it will still happen at the last moment, that is, by the end of this week or even at the beginning of the next.
In regards to the situation with the mutated coronavirus, there are more questions than answers. At the moment, scientists have not been able to provide detailed information on the new strain. Therefore, the "coronavirus factor" will put additional pressure on the British currency in the next few days.
Given all of the above, we can conclude that the GBP/USD pair remains bearish in the short term. Most likely, the pair will reach the base of the 32nd figure (the lower line of the Bollinger Bands indicator on the daily chart) before this day ends, while the main target of the decline is located below, which is at the level of 1.3110 (upper limit of the Kumo cloud on the same time frame).
