GBP/USD: Three reasons to fade the Barnier breakout - selling opportunity?

  • The GBP/USD rallied hard on Barnier's offer for a "special deal" for the UK post-Brexit.
  • There are three reasons why the gains are unjustified.

Chief European Union Negotiator Michel Barnier surprised markets on Wednesday. The usually tough official spoke in Berlin, and his tone was optimistic for a change. He said the EU is ready to offer the UK a "deal like no other country" and was upbeat. Until that moment, preparations for a no-deal Brexit stood out, and the mood was gloomy. The deadline to strike an accord was reportedly pushed back from October to November.

Barnier's words looked like a game-changer and markets responded. The GBP/USD jumped some 100 pips from the mid 1.2800s and then extended its gains, reaching a high of 1.3042 at the time of writing. The Euro also advanced, and stocks took a cue from his words.

However, there are three reasons to fade the move. 

Barnier and Scholz are actually not-so-optimistic

Thursday morning is already different than Wednesday afternoon. Barnier gave an interview to a German radio station and said that a solution on the Irish border was possible, but so are "all the options on the table," including not reaching a deal. To add fuel to the fire, he added that he "cannot speak about success regarding Brexit".

German Finance Minister Olaf Scholz that met Barnier during the latter's visit to Berlin was somewhat more pessimistic. He said that a disorderly Brexit is a "real possibility." This tone is quite downbeat, to say the least. 

Where are the details?

UK Brexit Minister Dominic Raab repeats the message that a "deal is within our sights" and Barnier was optimistic as well. However, we have not learned any details on the thorny issues facing both sides. These include the Irish border, critical to maintaining the Good Friday agreement in the Emerald Isle, customs, and the four freedoms of the European Union, which include the free movement of people.

Barnier did insist on Wednesday that the Single Market cannot be changed, but this warning was lost in the optimism about an exclusive deal.

Short covering

While Barnier's words on Wednesday were mostly positive, part of the massive move was a result of short covering. An extended period of pessimism triggered the accumulation of short positions against Sterling. A short-covering intensified the rally. However, now that these shorts are gone, the GBP/USD may have a clearer path to the downside, once markets realize that nothing material has changed.

Where can cable fall to? A lot depends on other factors as well, but a return to the pre-Barnier breakout levels cannot be ruled out.

More: Stuck Brexit negotiations point to a GBP/USD retest of 1.1946

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