Pound drops to 2-year low as no-deal prep ramped up

Summary:

  • GBPUSD falls to lowest level since March 2017

  • Brexit cabinet holds first meeting with no-deal risk rising

  • LSE stock jumps on plans for Refinitiv purchase

 

The pound has gotten off on the wrong foot at the start of the new week with the currency sliding across the board and falling to its lowest level in over 2 years against the US dollar. While the Bank of England rate decision on Thursday could be a decent market moving event for sterling, Brexit continues to be the dominant theme with a noticeable harshening of the rhetoric in recent days raising concerns amongst traders. Implied volatility from options markets has moved up to its highest level since early April, and a closer look at the skew of these derivatives reveals that downside protection is trading at a growing premium and becoming increasingly more expensive. 

Implied volatility in GBPUSD continues to rise as options traders start to price in some larger moves in the coming 3 months. Source: Bloomberg

Looking at risk reversals (a gauge showing the cost of downside protection relative to upside) reveals that traders are becoming more concerned about declines in GBPUSD. However, note this metric is still relatively high compared to the past 9 months. Source: Bloomberg

   

UK foreign secretary Dominic Raab has captured the tone of the latest position from the government in saying that the EU will need to move on Brexit in remarks that have done little to help the pound’s plight. PM Boris Johnson will today hold his first meeting with the Brexit cabinet, something which is scheduled to become a daily occurrence running up to the present deadline for the UK to leave the EU on 31st October. Even though the stated aim is to avoid a no deal outcome, the belief amongst the cabinet is that preparations must be made to make the threat of this eventuality plausible, and therefore enhance their negotiating position to reach a preferential deal to the one currently on offer. Despite this posturing, significant hurdles would have to be overcome for a no-deal Brexit to be delivered but just the expressed intention to pursue this path is enough to weigh on the pound for the time being. 

GBPUSD has dropped to its lowest level since March 2017 this morning with the market just a few hundred pips from the post-Brexit referendum low around 1.20. Source: xStation
 

LSE rallies 15% on takeover talk 

Investors have reacted positively to reports that the London Stock Exchange Group has confirmed it is in talks to buy Refinitiv. The price for the acquisition is believed to be in the region of $27B and is seen as an attractive proposition due to the expertise its possess in data and analytics. The early indications suggests that the valuation discussed is attractive and could boost EPS at LSE by as much as 21% in the first year. One issue to watch could be a potential regulatory challenge which would at least delay the deal but ultimately this would be unlikely to scupper it. The stock of LSE has gained more than 15% in response, moving above the 6500 mark to trade at its highest ever level.      

LSE has been in a clean uptrend for much of the year and has jumped higher today on reports that the firm are looking to acquire Refinitiv. Source: xStation

 

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