Following a whipsaw move on Wednesday, GBP/USD remained relatively stable near the 1.3000 mark during late European session on Thursday, as market players were assessing if a newly proposed bill by Britain to undercut the Brexit divorce treaty would prompt the EU to suspend negotiations.
On Wednesday the major pair slid to 1.2885, its weakest level since July 28th, after the UK published the Internal Market Bill, a draft legislation for the nation’s post-Brexit life, which acknowledged “inconsistency” with international law. The passage of the Internal Market Bill highlighted Britain’s intention to act outside international law by violating the divorce treaty with the EU.
Initially, the move added to concerns that EU-UK trade negotiations could be derailed. However, a bit later it became clear that the EU would not seek to suspend talks, sending GBP/USD back above the 1.3000 mark.
Market focus now shifts to the emergency meeting between EU’s chief negotiator Michel Barnier and British negotiator David Frost at 12:00 GMT today, in addition to this week’s ongoing negotiations. Societe Generale strategist Kenneth Broux said it expected further GBP volatility, as “the EU tries to understand what the UK is getting at with the Internal Market Bill and whether it brings risk of backsliding on the Withdrawal Agreement.”
In case emergency talks do not provide a sufficient reassurance for Brussels that a proposed new British legislation will not violate previous commitments between the two sides, the EU may take legal action under the divorce treaty.
Goldman Sachs analysts expect “the perceived probability of a breakdown in negotiations to escalate over the coming weeks.” Yet, the bank’s base case scenario still points to a “thin” free trade agreement.
As of 11:36 GMT on Thursday GBP/USD was edging down 0.13% to trade at 1.2985, while moving within a daily range of 1.2977-1.3035. The major pair has retreated 2.87% so far in September, following three successive months of gains.
In terms of economic calendar, at 12:30 GMT today the Bureau of Labor Statistics is to report on the US Producer Price Index performance. Annual producer prices probably dropped 0.3% in August, according to market consensus, slowing down from a 0.4% decrease in July.
Meanwhile, the nation’s annualized core producer price inflation, which excludes prices of food and energy, probably remained steady at 0.3% in August.
A separate report at 12:30 GMT by the US Labor Department may show the number of people in the country, who filed for unemployment assistance for the first time during the business week ended September 4th, probably eased to 846,000, according to market expectations, from 881,000 in the preceding week.
Bond Yield Spread
The spread between 2-year US and 2-year UK bond yields, which reflects the flow of funds in a short term, equaled 22.7 basis points (0.227%) as of 10:15 GMT on Thursday, down from 24.1 basis points on September 9th.
Daily Pivot Levels (traditional method of calculation)
Central Pivot – 1.2970
R1 – 1.3055
R2 – 1.3108
R3 – 1.3193
R4 – 1.3278
S1 – 1.2917
S2 – 1.2832
S3 – 1.2779
S4 – 1.2726