British pound slides as third round of Brexit talks resume
The British pound weakened against most currencies as market participants refocused on the ongoing third round of Brexit talks and the reopening of the UK economy.
Brexit talks resume
The third round of Brexit talks resumed yesterday as the two sides attempted to iron out key issues on trade, fisheries, and justice system.
On trade, the UK has insisted that it wants a Canadian-style trading agreement that removes most quotas and tariffs. The European Union has rejected this idea, saying that it will be unfair for the eurozone companies.
Meanwhile, on justice, the UK has said that it will not belong to the European Court of Justice after the transition period ends. EU representatives have argued that the country must belong to that judicial system to create a level playing field for its companies.
Fishing issues have also created key differences among the two sides. EU members, like France, have said that they will not ratify a deal that denies them access to UK fishing waters. This is partly because most EU fishermen catch about 50% of their fish in UK waters.
Other challenging issues being negotiated are on the nature of the deal and the status of the two sides. While the EU wants a single document, the UK has proposed having several deals.
Time is of the essence on these talks. As per the transition documents, the UK has until June 30th to request an extension.
As a result of these uncertainties, most hedge funds and money managers have placed short bets on the pound, according to data from the CFTC. A short bet simply means that they will profit when its value drops.
UK economy risks
At the same time, analysts are worried about the health of the UK economy, especially after Boris Johnson unveiled a three-stage plan to reopen the country. In a televised statement, the premier asked people who cannot work from home to return to work and observer social distancing measures.
Further, he said that some schools and some businesses will be allowed to reopen in June while most companies in the hospitality industry will be reopened in July. As part of the new guidelines, all people landing in the UK from abroad will be put into quarantine for 14 days to prevent the disease from spreading.
Labour leaders and other activists have criticised the new plan, saying that it does not go further enough to protect workers.
The bottom line
We expect the British pound to be a bit volatile in the coming days as the Brexit risks converge with a slowing economy. Most importantly, we expect the currency will be weak against the US dollar, Australian dollar, and the Japanese yen.
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