The pound paired with the dollar after a slight recovery has once again collapsed into the area of the 29th figure, reacting to the negative news background around Brexit.
The immediate reason for the decline in the GBP/USD was the news that the deputies from the Democratic Unionist Party (DUP) together with the conservatives (or rather – some of them) will vote for the draft law that will make the EU proposals on the Irish border illegal. In this case, negotiations on Brexit are highly complicated, and the probability of a chaotic "divorce" from the EU without a deal will increase.
Let me remind you that Brussels is lobbying for the idea of leaving Northern Ireland within the framework of a single European market and a customs union – temporarily, until the parties come to a compromise on this issue. In Britain, many do not agree with this scenario – according to some conservatives, such a decision would be contrary to the constitutional principles of the country and would de facto violate its territorial integrity. Theresa May and the deputies who support her are also not happy with this idea, but are discussing this option among others. Therefore, representatives of the most "hawkish" wing of the Parliament plan to exclude such a scenario at the legislative level. Previously, only a few dozens of conservatives were discussed, but today it has become known that the Democratic Unionist Party will support this legislative initiative.
The DUP is an ally of the conservatives in Parliament, as the Tories were forced to form a coalition after losing the majority in the early elections. The Unionist party has the so-called "golden share" : they have only ten representatives in the Parliament (out of 650), but they provide the majority that allows making legislative decisions. Therefore, May cannot ignore their opinion about the prospects of Brexit. According to one version, for this reason, the October EU summit failed – the prime minister did not rush into compromises (which one way or another, but would have to go), so that the unionists could not block the draft British budget.
Therefore, when the DUP's position on the draft law became public today, the pound collapsed throughout the market. The situation can be divided into two parts. First, the new law will significantly complicate the negotiation process, the deadline of which is December of this year. The second part of the problem is broader. The fact is that many experts again voiced doubts about whether Theresa May will be able to consolidate British politicians to make a compromise decision that is so necessary for the deal? Constant political squabbles, threats of impeachment, destructive legislative initiatives are all signs of London's "incompetence". Today, this fact again reminded itself, putting significant pressure on the pound.
By the way, talks about the possible resignation of Theresa May again began to be actively discussed in the market. One of the British journalists published a letter of a Deputy of the Conservative party, in which he urged his colleagues to express no confidence in the prime minister and to re-elect the party leadership. Similar letters have emerged before, but their authors were members of the so-called "rebel group", who have been advocating impeachment for almost a year.
But in this case, according to the journalist, the author of the appeal is a centrist who previously supported the actions of May. After that, concerns arose in the market that the centrists of the Conservative Party would also support a relatively small group of "rebels". In this case, the likelihood of a resignation will really increase – as well as the probability of Brexit without a deal, because the possible successor of Theresa May is Boris Johnson, who is an uncompromising supporter of a "hard" divorce from the European Union.
The British currency is very sensitive to the news noise regarding the prospects of Brexit. Therefore, the lack of coordination and numerous internal party conflicts against the background of the possible resignation of Theresa May led to the expected result - the pound/dollar pair turned around and tested the 29th figure again.
But in technical terms, bears have not yet confirmed the priority of a downward movement. Now we are dealing with a impulsive price decline, but to talk about a further decline, the pair needs to consolidate below 1.2930 - at this price point, the lower line of the Bollinger Bands indicator coincides with the lower border of the Kumo cloud on the daily chart. If the price overcomes this barrier, the Ichimoku Kinko Hyo indicator will form a bearish "Parade of lines" signal – in this case, the price may fall to the level of 1.2760 (the lower line of the Bollinger Bands on the weekly chart) and even in the area of annual lows (the middle of the 26th figure).
It is worth noting that today Theresa May can encourage market participants with a statement that the deal is ready by 95% - but optimism is unlikely to be long-term. Even one inconsistent percentage can destroy all other agreements, therefore, the upward price pullbacks of the GBP/USD pair should be treated with caution.
The material has been provided by InstaForex Company - www.instaforex.com