Intraday Market Thoughts Archives

Obtaining the required 320 votes to back Saturday's passing of the Brexit deal will be tough but not impossible. If the deal passes, we expect gaps in cable to as high as 1.3180s. How about if Parliament rejects the deal? Will it depend on the margin of defeat? Will a rejection by a 2-vote margin have a different GBP impact than 15-vote margin? We saw how GBP retreated on Thursday when the DUP said it will vote against the deal in parliament, making unlikely the deal will pass in its current form. More on the necessary numbers in here. As I write this, GBPUSD has spiked 0.3% to 1.2932 on reports that the Brexit deal will be passed tomorrow.

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Boris Johnson's strategy is to turn Saturday's meaningful Brexit vote into a do-or-die situation. The Benn amendment took away his ability to execute a no-deal Brexit so he has tried to get the EU to manufacture one. If he convinces the EU to reject a Brexit extension in case of a "No" on Saturday, then it will sway a few more desperately-needed votes in his favour.

But it's all a bluff. Merkel, Macron and other EU officials have said time and time again that the EU shall not be the reason there is a hard Brexit. Juncker tried to create some ambiguity and it seems to have had some effect on the market but parliamentarians aren't likely to be deluded on Saturday. It's not a choice of this deal or no deal. It's a choice of this deal, or extend. Depending on the extension, there's a chance that elections and 2nd referendum chatter could resurface, which may not be such a bad thing for sterling.

The DUP appears to believe it can get a better deal. The leadership Thursday said 'this isn't even the beginning of the end'. There is also the question of whether there is time for a legal text and assessment before Saturday; something that could sway other voters.

So what happens next?

In the event of a "No" outcome, an election remains the most-likely way forward but it isn't as likely as it was a month ago. The problem for opposition parties is that it looks like they will lose and Boris will gain a larger majority, possibly with a few of the trouble-makers in his party ejected. With a larger majority, he could easily pass this deal and may even try to press the EU for more.

Labour has sensed this and they're having second thoughts about pushing for an election. They were banking on Johnson not being able to get any changes to May's deal (as the EU long promised) and being forced into an embarrassing climb-down from his Oct 31 pledge. Instead, he's got a fresh deal and he can now blame Labour and others for sabotaging it if it fails. With that, Labour may be shifting strategies towards calling for a new referendum. Corbyn isn't yet comfortable with it but it's more likely than a week ago.

What about the market? A deal failing to get through parliament will weigh on GBP but the risks are two-sided headed into the weekend and the market is short, so there may be a drift higher in GBP, baring any fresh headlines.

If there is a dip or a drop, it's likely an opportunity to buy. The important thing this week is not that the DUP is against the deal, but that Boris has a deal that can be supported by the the ERG. When it passes is probably only a matter of time.

A GBPUSD Premium trade is currently open with supporting charts and notes.

The risk is that Labour and the LibDems somehow force a fresh referendum. That would add considerable fresh uncertainty and a deeper dip. But ultimately it's a win-win for the pound in that either the UK stays in the EU or this deal is accepted and the uncertainty is removed. ِ

GBP pushed to a fresh 5-month high of $1.2990 after news of an agreement on renegotiating the Brexit deal between the UK and the EU. Now the deal will be voted upon by the British Parliaments in a special session on Saturday, requiring the backing of 320 MPs to pass. The looming danger of defeat from ongoing DUP opposition is the major source of risk to GBP trades. We are also watching crucial technical dynamics in US & European equity indices vis-a-vis some of their sectors. The DAX30- trade was stopped out early Thursday and 2 new Premium trades were issued on Thursday evening.

The new deal differs from Theresa May's Withdrawal Agreement via more alignment between the EU single market and Northern Ireland. The latter will remain an entry point into the EU's customs zone and products entering Northern Ireland will not be charged as long as they are not deemed risky to leave the border.

Fighting for 320

Considering the DUP's opposition, in order to obtain the minimum 320 votes in Parliament for the deal to be passed on Saturday, Boris Johnson must win as much as support as he can from the 287 Conservative MPs, as well as the 23 former Tory MPs) most of whom were dismissed from the Party after they rebelled against his decision to prorogue parliament). The key question is will enough Labour MPs vote for the deal to reach the total 320. One crucial issue is the “constituency factor”, which could force undecided Labour MPs to vote alongside their predominantly Brexiter constituency.

Few hurdles remain on ahead of a Brexit deal and a smooth ride is unfathomable, but now is a good time to ask the question: What is a deal worth in GBP/USD?  GBP is again the day's top performer, becoming the 2nd stronger performer of the year. The latest from Brexit talks developments is a UK govt source indicating there will be no Brexit deal tonight due to unresolved issues with both the DUP and EU. But negotiations will continue this evening as other officials say technical talks are continuing and most issues are resolved apart from VAT. The latest video for Premium susbcribers is found below.  

The UK and EU appear generally to be headed towards a Brexit deal and the pound is cheering the move. It has surged in four of the past five trading days, while accumulating 650 pips over the last 7 days, surpassing the 200-day moving average and breaching a crucial 7-month trend line. Ashraf discusses the changing dynamics in yield differentials in this piece.   The latest moves also a 900-pip rally in GBPJPY.

Short-term indicators are deeply overbought, but short-term indicators are always overbought on a major shift in economic news so that may not be telling. In addition, positioning was extremely short GBP in the latest CFTC data and has been so for many months. Unwinding those structural positions will take weeks. The unwinding of long GOLD/GBP positions continues in earnest.

On the eve of the Brexit referendum, the pound was trading at 1.4250, incorporating a tremendous amount of uncertainty. Before the referendum had been called it was trading above 1.5000 and in 2014 it traded as high as 1.70. Thus, the question is to what extent has political uncertainty exceeded economic fundamentals?

At this point nothing should be taken for granted considering the remaining divisions in parliament and continued oppposition from the DUP. But these very obstacles suggest an upside target as high as 1.37 and later 1.40 in the event of a deal. And do not forget the BoE element, whereby the central bank could hints at rate hikes and/or the government offers fiscal stimulus.

PM Johnson is also pushing for a deal by this week, otherwise he will have to ask for an extension. Parliament will be open for a special Saturday session to hold a vote over a deal, which means that key trading decision will have to made ahead of the weekend.

Here's the latest on UK yield spreads with the US. Full analysis and charts.

The market caught deal fever last week but hope turned into skepticism early this week. Indices are higher, awaiting the release from the rest of US bank earnings (after JPM beat estimates).  GBP is the strongest performer of the day amid recurring remarks from UK & EU officials expressing attempts to reach a deal in the final innings (more below). Beijing said it would buy $50 bn more in US agricultural goods only if Washington removed retaliatory tariffs set since the start of the trade war. A new Premium trade has been issued, backed by 3 charts & 6 key notes. The chart below highlights the emerging support for the GBP's trade weighted index amid Brexit negotiations.

One way to look at the China-US trade deal is probably through the Federal Reserve's prism. Policymakers have been relatively consistent with the idea that the economic impact has been modest, but uncertainty did curb business investment, while threateneing consumer confidence.

The deal announced Friday is a short-term ceasefire that removes two months of uncertainty at best. Reviews in the Chinese press have left out parts of the deal that that US has touted, like agricultural purchases and the 'phase 1' terminology that Trump has touted. It all reflects an unease that any commitments will last. That was reflected in trade on Monday as yen crosses drifted lower along with stock markets.

Earlier today, St Louis Fed president Bullard said the Fed's hitting the low side of inflation target is concerning and that monetary policy will not fix th problems created by tariffs.

UK-EU not giving up

A revised set of proposals with regards to the cutsom rules for Northern Ireland was submitted by UK negotiators to the EU as the 2 sides attempt to reach a deal this week. Worries remain concrete with DUP officials expressing skepticism of any deal that doesn't leave them fully in the UK. Yet the highest levels in 10 Downing Street report that EU and UK officials are making progress. That leaves markets in the uneasy position of wondering if a deal can get through Parliament.

Elsewhere, US banks' earnings season hits today, with JP Morgan beating earnings estimates. Goldman Sachs, Citigroup and Wells Fargo will follow shortly.

تابعوا الندوة الالكترونية " المخاطر على الإسترليني بين بريكست والانتخابات" مع أشرف العايدي مساء الغد، في الساعة 9 مساءً بتوقيت مكة المكرمة. للمشاركة من السعودية و للمشاركة من جميع باقي الدول