GBP/USD volatility slides to 2-month low ahead of tense Brexit talks

GBP/USD volatility slides to 2-month low ahead of tense Brexit talks
  • The GBP/USD pair wavered ahead of the fourth round of virtual Brexit talks.
  • Data from Lloyds Bank showed that business confidence fell to 2008 low even as the economy started to reopen.
  • The pair's volatility, as measured by the ATR, dropped to lowest level since March.

The GBP/USD pair was little changed today as the market refocused on the upcoming Brexit talks. The pair is trading at 1.2336 while the British pound index has risen by almost 50 basis points. At the same time, its volatility has dropped to a 2-month low.

British pound
GBP/USD wavers ahead of Brexit talks

GBP/USD wavers ahead of final round of Brexit talks

Talks between the UK and the European Union have been acrimonious. This is evidenced by the fact that the two sides have made minimal progress in the previous three rounds of talks.

The fourth session will start on Monday next week and run throughout the week. This will be the final meeting ahead of a final summit that will take place in June to assess the progress. It is in this summit that Boris Johnson will decide on whether the UK needs more time to iron out the key differences.

The third round of Brexit talks ended acrimoniously, with Michael Frost and Michel Barnier exchanging nasty letters. In his letter, Frost accused the European Union of trying to box the UK into remaining in the union directly. He cited the “level playing field” rules the EU was insisting on. In his part, Barnier said that the UK must be flexible and accommodative to demands by the union.

Key differences between the UK and EU on Brexit

There are several key differences between the two sides. First, while both sides want a free trading agreement, the EU insists that the UK must operate within its laws to prevent unfair competition. The UK wants to set its own rules.

Second, the two sides have disagreed on the European Court of Justice (ECJ). The EU has insisted that the UK needs to remain a member, which will help to arbiter key differences.

Finally, the UK wants to take control of her rich fishing waters where eurozone fishermen catch more than 50% of their catch. The EU has rejected this. A timetable released yesterday showed that the two sides will deliberate on fisheries on Tuesday, Wednesday, and Thursday.

According to Article 50, the UK must seek an extension by June 30. If it does not, the article can not be used because the UK will be a third country. This is risky because the EU is the UK’s biggest trading partner. This poses risks to the British pound and the GBP/USD.

The timetable released shows that the members will also deliberate on trade in goods, energy, social security, and aviation. The government published this after it emerged that Boris Johnson would fly to Brussels in June to deliberate on the deal.

Meanwhile, economic data released today showed that business activity in the UK was still under pressure. A study by Lloyds Bank showed that business confidence declined to -33, the lowest it has bee since 2008. The report said:

“Despite the results partly capturing the period since the government’s announcement of an initial easing of restrictions, trading conditions remain difficult for most firms.”

GBP/USD technical forecast

GBP/USD
GBP/USD technical analysis

The daily chart shows that the GBP/USD pair is between the 38.2% and 50% Fibonacci retracement level. The price is also three pips below the 50-day exponential moving averages and about 60 bps below the 100-day EMA. The volatility as measured by the Average True Range (ATR) has dropped to the lowest level since March 10. This means that the pair will breakout in either direction as the new month starts.

By Crispus Nyaga
Crispus Nyaga is a finance analyst and trader with more than 7 years industry experience. He's contributed to some of the leading financial brands in the world including Seeking Alpha, MarketWatch, Forbes, and Investing.com. Crispus has an excellent understanding of global macroeconomic and geopolitical issues, is a big fan of golf, and lives in Nairobi with his wife, son, and nephew.
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