GBP/USD: Darkest Before Dawn Or Is A No-Deal Brexit Real? Sterling Suffering May Extend

Strong possibility of exiting on Australian terms” – aka a no-deal Brexit – these words by UK Prime Minister Boris Johnson have been compounded by similar comments from European Commission President Ursula von der Leyen. The top-ranking EU official has told the bloc’s leaders that the probability of ending talks without an accord is higher than clinching a last-minute deal.

This pessimism follows a long meeting between Johnson and VDL on Wednesday that ended with yet another deadline – Sunday night. Brussels is not only talking but also seems to be acting – the EU published contingency plans on Thursday and decided to skip talking about Brexit on its second day of the summit.

The three thorny topics remain fisheries, governance and a Level-Playing Field (LFP). The latter topic is proving to be the hardest issue. The EU insists that Britain should not have the option to undercut the bloc on labor, environment and other regulations, while the UK is adamant that any limits to regulation violate its sovereignty.

GBP/USD’s suffering has exacerbated, dipping to a low of 1.3184 – the lowest since November 18. Andrew Bailey, Governor of the Bank of England, added fuel to the fire by saying that there are limits to what his institution can do to mitigate the fallout from a no-deal Brexit.

The question for traders is – time to sell ahead of an inevitable collapse of talks? Markets seemed to price in a last-minute deal, and if that fails to materialize, the pound has further room to plunge.

On the other hand, the 2019 Withdrawal Agreement was reached at the last moment – and there is nothing like a deadline to sharpen minds. Both sides may be putting a brave face for their local audiences before making hard concessions. In that scenario, the recent fall provides a buying opportunity.

The most likely scenario for Friday is further pressure during the day and a late short-covering ahead of the weekend. Sterling sell-off may have gone too far and there is an upside risk of a deal over the weekend.

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