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Currency Market Analysis

Oct 18, 2019 | Currency Market Analysis

Global Themes

Vital vote awaits on "Super Saturday"

Brexit in bullets
- UK and EU agree Brexit deal (again)
- PM Johnson must secure Parliament’s backing
- Approx. 320 votes needed (assuming no abstentions)
- DUP and Labour expected to reject the deal
- Vital vote on “Super Saturday”
- Opposition could try and attach confirmatory referendum to the deal
- If deal not approved, PM should request extension
- GBP/USD 7-day range = $1.2207-$1.2988
- Where will GBP be trading Monday morning?

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All eyes on “Super Saturday”
Sterling has gyrated with every twist and turn of the Brexit developments, particularly this week. GBP/USD has bounced around in a circa 2-cent range five out of the last six trading days. Despite PM Boris Johnson clinching a new divorce deal with the EU, the major hurdle of securing parliamentary approval is yet to come. News of the deal sent sterling springing to fresh 5-month peaks against the US Dollar and Euro, near $1.30 and €1.17 respectively, before quickly recoiling.

This Saturday, PM Johnson faces the same challenge as his predecessor Theresa May and the market mood has soured amidst this heightened uncertainty. Sterling sharply reversed course yesterday after Labour and the Democratic Unionist Party (DUP) said they would not support the new agreement. Market participants took profit on sterling’s parabolic rise over the past week to send GBP-currency pairs lower or flat on the day. If the deal is approved, the pound is expected to shoot up towards and above $1.30 versus the dollar and towards €1.18 against the Euro. If it is rejected, then other factors come into play. Will the PM request an extension as he is legally required to? Will the EU grant an extension and for how long? The risk of a general election looms and rumours are swirling about a confirmatory referendum being attached to the deal to gain support from opposition parties. Either way, come Monday morning, the value of the pound could be substantially higher or lower from where it closes today.

Aside from the uncertainty over the DUP, the parliamentary arithmetic gets messy as 21 Conservative MPs were expelled by the PM after voting in favour of obstructing a no-deal Brexit and others voluntarily quit. Will these MPs vote in favour, reject or perhaps choose to abstain?

The parliamentary arithmetic
Former Prime Minister Theresa May failed three times to secure parliamentary approval for her Brexit deal. This deal is virtually the same apart from issues regarding the Irish border, but this was the major sticking point and the changes could garner more support for the deal. PM Johnson needs to secure 320 votes, given no MPs abstain, but there are only 287 Conservative MPs.

The 10 DUP voters are expected to reject the deal, which may influence some hardline Tory Brexiteers to rebel too. Mr Johnson is therefore relying on votes from the 20 former Tory rebels who were expelled by the PM for voting in favour of the Benn Act and now sit as Independents. He is also relying on around 19 Labour MPs in Leave seats who have suggested they might be persuaded to vote for an appropriate deal to ensure Brexit is delivered. The political landscape remains complex and convoluted, and anything could happen over the weekend, or even today, to alter the pathway to Brexit.

The stage is set for Parliament to sit from 9.30am until 2.30pm tomorrow. If the deal is passed, the UK will leave the EU on October 31 and enter a transition period until at least December 2020.


Euro to rally on Brexit deal?
As the Brexit battle rumbles, the Euro awaits patiently in the background. When positive Brexit developments have unfolded, the common currency has been largely ignored compared to the pound, but will it soon enjoy a prolonged positive run or remain slumped near 2-year lows on a trade-weighted basis? Brexit optimism has seen sterling surge over 5% this week alone against many currencies, but EUR/USD has only risen around 1.2%.

An orderly Brexit will remove the uncertainty that has plagued markets for more than three years, and not only will the pound benefit, but the Euro should too. For this reason, GBP/EUR is not expected to rise as high or as sharply as GBP/USD. Moreover, EUR/USD may look to extend its recent recovery from 28-month lows as demand for the Euro picks up. Nevertheless, a main factor dampening Euro demand is the weak economic outlook for the Eurozone. Macro data has been overwhelmingly poor over the past year or so. Recession fears in Germany, Europe’s economic powerhouse, continue to haunt investors. Eurozone inflation has slowed to its lowest level in nearly three years, and the European Central Bank has ramped up its stimulus measures. Eurozone exports and international trade are also decreasing as a result of the global trade tensions and tariffs imposed by the US.

The US is due to impose tariffs on $7.5 billion of European goods today following the green light from the World Trade Organisation because of subsidies given to plane maker Airbus.

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