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GBP/USD. Johnson's populist move scared the British currency

Today, the pound was under pressure from a fundamental background - both from the side of macroeconomic reports and from the future prospects of Brexit. The British currency could not withstand the onslaught and collapsed against the dollar by almost 200 points, heading towards the 31st figure. For the first time since the announcement of the results of the parliamentary elections, the GBP/USD pair has shown such a powerful downward movement.

The usual pessimism returned to the market regarding further relations between London and Brussels - and this despite the 100% probability that the new composition of the House of Commons will approve the long-suffering agreement with Europe. But now, the market is discussing more distant prospects, evaluating the "negotiability" of the parties in the transition period. Today, Johnson took the first step in this direction, which seemed very "unfriendly" to traders. Although, according to some experts, the prime minister begins to artificially escalate the situation, while resorting to banal political blackmail.

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He used similar mechanisms in the previous months of his reign, instilling fear of the "hard" Brexit. In his opinion, Brussels made certain concessions only after he saw the seriousness of his intentions. According to him, Theresa May was ready "indefinitely" to prolong the negotiation process, so the Europeans firmly stood their ground, not fearing the consequences of the chaotic Brexit. However, the European Union "showed flexibility" in the negotiations as soon as the negative scenario began to take on real features, which Johnson took advantage of when he concluded the deal. At least, the current prime minister sees the situation exactly like that. Therefore, in preparation for a months-long transition period, he begins to "tighten the screws" ahead of time, occupying the most advantageous (in his opinion) position in the negotiations.

So, today, it became known that Johnson's Cabinet of Ministers plans to legally exclude the possibility of prolonging the transition period after the approval of the Brexit deal. Members of the government made corresponding changes to the bill regulating the process of the country's exit from the Alliance. These amendments suggest that the transition period will end on December 31, 2020 and will not be extended regardless of the outcome of the negotiations.

On the one hand, conservatives with these amendments fulfill their party promises - Boris Johnson's election rhetoric was based on Britain leaving the EU as soon as possible. The impressive result obtained by the conservatives in the elections obliges the prime minister to pass from words to deeds, which he actually did. At the same time, he demonstrated to Brussels the seriousness of his intentions regarding his further actions. For several months, Johnson warned that he intends to withdraw the country from the European Union "with or without a deal." Now, this threat has survived reincarnation. However, we are talking about the timing of the transition period in this case. During 2020, London and Brussels need to conclude a free trade agreement, but many investors doubt that the parties will have time for such a relatively short time to find a common denominator, especially given the hard line of the British Prime Minister.

In particular, the EU's chief negotiator, Michel Barnier, said a few months ago that some points of future relations would have to be coordinated "for several years". If Britain does not have time to find a common denominator with the EU and refuses to extend the transition period, then the country will be forced to focus on the conditions of the WTO, with all the ensuing consequences. In addition, Mark Carney has repeatedly warned that this scenario will be one of the worst for the British economy.

Against the backdrop of such prospects, the pound collapsed throughout the market, including paired with the US currency. Today, the labor market data that were released put additional pressure on the Briton. And although unemployment remained at the same level (3.8% with a forecast of growth of up to 3.9%), the number of applications for unemployment benefits increased significantly - to almost 29 thousand (with a forecast of 20 thousand). Salaries are also disappointing. In October, the average earnings level (including premiums) grew to just 3.2% - this is the weakest growth rate since April this year. However, this indicator came out better than expected without taking into account premiums, being at around 3.5%. Unfortunately, this fact did not help the pound, which continues to fall to the basket of major currencies.

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However, the "political factor" may have a short-term effect on the market. The above amendments are likely to be adopted already at the end of this week, but this does not mean that Britain will draw the final line, indicating the deadline for the transition period. Obviously, if necessary, it will be possible to amend the text of the adopted law, thereby prolonging the transition period. After all, it is worth recalling that Johnson at one time almost swore to his party members that he would not postpone Brexit's term - but, after a few months, he still agreed to this step. Therefore, in this case, a similar scenario is not ruled out.

In other words, we are dealing with the populist behavior of an experienced politician, who marked the start of the next stage of negotiations with Brussels. But the transition period is still more than a year away, so the devaluation of the pound is now clearly too early.

The material has been provided by InstaForex Company - www.instaforex.com