Where next for the Pound as Brexit delay looks increasingly likely?

There’s been further gains seen in the Pound in recent trade with GBPUSD rising to its highest level in over a month and the EURGBP slumping to a 21-month low as the markets seem to be increasingly pricing in a more favourable Brexit outcome. Are these hopes misplaced or are there more gains to come for the Pound?

Summary:

  • UK PM May paves the way for Brexit delay

  • Corbyn backs 2nd referendum

  • GBP gains and UK stocks fall back in reaction

 

The long and protracted Brexit saga which began in earnest in June 2016 when the UK voted to leave the EU has made some potentially significant twists and turns in recent days, as the March 29th deadline for the country to leave the bloc draw ever closer. Since UK PM Theresa May saw her deal rejected in a “meaningful vote” last month, there’s been steady gains seen in the Pound as traders appear to be betting that a no-deal Brexit, which would be the most negative for Sterling, is becoming increasingly unlikely. The markets have been wrong on Brexit before, with the rally ahead of the referendum catching many off guard and should the threat of a no-deal increase significantly in the day sand weeks ahead the currency would be susceptible to a large decline.  

The GBPUSD hasn’t looked back after making a low last month following the rejection of PM May’s Brexit deal. The market is back above the $1.32 handle and rising on hopes of a more market favourable outcome to Brexit. Source: xStation

 

What will happen next?

This is really the key question in determining the market impact as for the time being the default outcome remains a no-deal Brexit unless an alternative can be agreed before the 29th March deadline – or unless this deadline is extended. Monday evening, Jeremy Corbyn, the leader of the opposition threw his weight behind a second EU referendum, backing the ballot if Labour’s own version of Brexit fails to get passed this week. The chances of MPs supporting the bill from Labour are slim to none, which means that Corbyn will likely push for a second referendum; but in all likelihood these attempts will be futile.

 

Key dates to watch:

·         27th Feb: MPs scheduled to vote on Cooper-Letwin plan

·         12th Mar:  “Meaningful vote” on PM May’s deal

·         13th Mar: Vote on leaving with no-deal, if rejected vote on extending

·         21-22nd Mar: EU summit

·         29th Mar: Brexit day (Unless Article 50 extended)

·         1st July: (Any Brexit extension date up until this date would not require UK lawmakers to take part in the elections as the newly elected European parliament only sits for the first time on 2 July)

 

Theresa May told parliament this lunchtime that should they reject her re-worked deal next month then MPs will have the chance to vote for an extension of the Article 50 deadline and leaked reports of this provided the boost that has pushed the pound higher.

In effect, this is a smart move from a political point of view for the PM as it heads off the perceived threat of resignations from around a dozen pro-EU ministers, including cabinet members, several of who reportedly oppose a no-deal Brexit so vehemently that they would have quit had she not altered her course. Furthermore, lawmakers are set to vote on an amendment (Cooper-Letwin) tomorrow that if passed would essentially, lead to the same outcome in seeking an extension of the Article 50 deadline beyond 29th March, so in effect May has given in to this before the vote.

 

So, to summarise:

  • The most likely outcome now appears to be an extension of Article 50 by a couple of months but not beyond the 1st July (due to new EU parliament beginning on 2nd July).

  • The probability of a no-deal Brexit has diminished

  • While still unlikely, the chances of a second referendum have increased

  • Brexit could still occur on March 29th if MPs back May’s deal but this also appears unlikely.   

 

3 markets to watch:

GBPUSD

The latest gains in the GBPUSD have seen the market push up towards key resistance around the $1.33 handle. The 50 and 200 day SMA could be on the verge of printing a bullish cross (50 above 200) and this has done a good job of capturing the larger trend on the last couple of occasion cross occurred. Source: xStation

 

EURGBP

The EURGBP has dropped to its lowest level since May 2017 today with price dropping below the potentially key support around 0.8620. This could be an important level to keep an eye on from a daily close perspective as a close below it would open up the possibility of larger declines. Source: xStation

 

UK100

UK stocks have come under pressure of late from the gains seen in the pound. The UK100 has dropped below support at 7115 today after respecting resistance around 7220. The 50 and 200 SMAs remain in a bearish orientation with price currently in between. Source: Xstation

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