Sterling continued to erase its post-election gains against the Norwegian krone for the third consecutive day after Boris Johnson announced his plan to stick to a 2020 Brexit transition period, bringing the risk of a no-deal divorce with the European Union back on the table.
The pound surged to multi-year highs against other major currencies after the Conservative Party won an overwhelming majority at the UK elections last week, allowing Johnson to push his Brexit deal through the Parliament and get Brexit done by January 31.
This triggers a transition period during which the UK and the European Union would be negotiating their future relations in trade, politics, security, and other fields.
Initially, the transition phase could be prolonged by as long as two years, but Johnson seems determined to reach an agreement — similar to the trade deal between Canada and the EU – by the end of 2020.
Markets are worried this one-year period could be too short to reach a deal, given that talks between Canada and the bloc took around seven years to complete.
The currency markets had a quite rude awakening following the news, with the pound losing as much as 3.2% against the krone since the Friday high of 12.21. As of 7:10 a.m. London time, the GBP/NOK pair traded at 11.84.
Today, markets will eye the UK CPI report for November, which is expected to show a slowdown in consumer prices to 1.4% y/y. The release is scheduled for 9:30 a.m.
Tomorrow, Norges Bank is expected to keep its key policy rate unchanged at 1.5% after two rate hikes in the last six months.
From a technical standpoint, the GBP/NOK pair reached the 61.8% Fib level measured from the November 8 close to the December 10 close which could provide some buying pressure in the pound. The RSI is forming a hidden bullish divergence on the back of the pair’s strong down-move in the last two days.