Brexit

Sterling Remains Locked in The Political Headlights – Again

Brexit

Big political developments and big debate and big news noise erupted in the UK yesterday, but not a lot that would appear to have any bearing on how the unresolved Brexit process will unfold, although underscoring how divided and distracted the political system is. A lot is at stake, including the possible devolution of the United Kingdom, along with Brexit. Prime Minister Johnson accepted the Supreme Court’s ruling that his decision to suspend Parliament for five weeks was unlawful while stating that he disagrees with it, and politicizing it with a full-throttled hamming-up the people vs parliament narrative, roiling up the pro-Brexit base ahead of an upcoming election. The opposition is sticking with its tactical refrain from agreeing to an election or staging a confidence vote until the avoidance of no-deal Brexit on October 31 has been assured. If Johnson fails to secure a deal with the EU, the new law (the Benn bill) that will extend Brexit to January 31 will kick in on October 19. The opposition is in part concerned that calling an election before October 19 would leave room for Johnson to trigger a no-deal Brexit before the election has taken place, while they are also wanting to force Johnson to break his “do or die” promise to deliver Brexit by October 31, thinking this will cost him votes at the election.

Cable moved down over 1% yesterday and has moved another leg lower today within a pip or two of 1.2300. PM Johnson returned to a particularly vitriolic and acrimonious Parliament as the Brexit deadlock looks no nearer to a conclusion. When, how or even if the UK leaves the EU still remains unresolved, and as ever, uncertainty breeds fear and fear spikes confidence, sentiment, and the long-suffering pound. Cable remains rooted under 1.2400, triggering another move lower on the crossing EMA (H1) strategy at 07:00 GMT today, for a net gain of 27 pips.

The move lower yesterday took the pair down to the 20-day moving average and the 38.2 Fibonacci level around 1.2335. A breach of this level and 1.2200, the 61.8 Fibonacci level and the recent low below 1.2000 are next support areas. 1.2500 remains a key psychological line in the sand to the upside, beyond which is the recent September high at 1.2580 and the 200-day moving average at 1.2650.

With sterling down some 15% from the EU Referendum in June 2016, a potential significant upside move cannot be ruled out. The upside move will only come with some clarity in the Brexit process. The assumption, by many market participants, is that all sides want a deal and that the pain and disruption of a no-deal exit will cause both parties to compromise. So far there are little actual or practical signs of such compromise and the talking at least continues. The latest is that UK Brexit Secretary is to meet chief EU negotiator Barnier tomorrow in Brussels. Halloween is some 36 days away.

Most likely, Brexit will be delayed to January 31 and a general election staged in late November or December. The election will presumably be the final Brexit battle. One of four endgame scenarios will be produced by the election, depending who the victor is, or what possible inter-party alliances or coalitions prevails:

1. A no-deal Brexit on January 31 (which would be the fruit of a possible Conservative-Brexit party coalition).

2. Brexit with a deal and transition phase (the Conservative Party’s preference, though the party would have to win the election outright, which there is potential for, and reach an accord with the EU, which would be an uncertainty).

3. Brexit with a deal and multi-year transition period, but also subject to a “confirmatory” referendum (which is the position of Labour and SNP).

4. Brexit canceled (which is the position of the Liberal Democrats).

For the Pound, which has been the principal conduit of the financial market opinion of Brexit, outcome number 1 would be the most bearish scenario, while outcome 4 would be the most bullish.

Stuart Cowell, Head Market Analyst at HotForex

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