- The GBP/USD declined sharply ahead of the fifth round of Brexit negotiations.
- Analysts expect the EU and the UK to differ significantly on key issues like fisheries and trade.
- The pair also declined after the US warned the UK on Huawei investment.
The GBP/USD pair dropped by more than 0.60% as traders refocused on the upcoming round of talks between the EU and the UK. They also reacted to the US warning to UK on Huawei relationship. The pair is trading at 1.2330, which is the lowest level since June 1. The British pound index is down by 0.56%.
Fifth round of Brexit talks to start
The UK voted to leave the European Union four years ago. While the country left the European Union in March, business between the two countries is going on as usual as the two sides negotiate a free trade agreement.
The two sides started their meetings in March but halted them when the coronavirus became a pandemic. Since then, the EU and the UK have met virtually for three more rounds, but no ground has been covered.
The fifth round of talks will start on Monday in Brussels as the two sides attempts to reach a deal. A timetable released yesterday showed that the two sides will talk on several issues. Among the most prominent are fisheries, criminal law, trade in goods, networks, energy, and transport, and trade in services, among others.
Expectations for this round of talks is low because of the divergent views by the two sides. The biggest issue between the two is on regulations. The UK has said that it wants to take charge of its regulatory and environmental framework, which the EU rejects. The EU argues that self-regulating will lead to unfair competition.
Also, the UK has rebuffed the idea of implementing tariffs if the UK makes laws that it does not want. In a tweet, David Frost said:
Still, the EU has an upper hand considering that it sells less than 5% of its goods to the UK. The UK sells almost 50% of all its goods to the European Union.
US warns the UK on Huawei
The GBP/USD pair also reacted to a warning by the US to the UK on Huawei, the Chinese computing giant. The warning came after South Cambridgeshire local authority accepted a $1.24 billion investment from the firm. The company will now set-up a chip research and manufacturing facility there. In a statement, the administration said:
“We urge all countries, particularly allies and partners like the United Kingdom, to carefully assess the long-term impact of allowing untrusted companies like Huawei access to sensitive information.”
The company will employ about 400 people to research and manufacture optoelectronic chips and equipment.
The decision risks worsening the relationship between the US and the UK at a time when the two countries are negotiating an FTA.
GBP/USD technical analysis
The daily chart shows that the GBP/USD pair is trading at the lowest level since June 1 ahead of the Brexit talks. We also see that the price formed a bearish shooting star pattern on June 10. This price is below the 50-day and 100-day exponential moving averages and is between the 50% and 38.2% Fibonacci retracement.
It has also formed a head and shoulders pattern. This implies that the pair will continue moving lower as bears attempt to test the next support at 1.2070. This is the lowest point on May 18.