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All change at Westminster — the markets respond

  • As parliament temporarily closes its doors, the Brexit debate looks set to continue
  • With the political jostling moving away from Westminster, sterling looks set to be impacted by as yet unidentified sources
  • The recent GBPUSD bullish patterns will ‘do or die’ according to the chance of a no-deal Brexit happening

Monday saw the Brexit saga move on to a new stage. The proroguing of parliament means the legislative chamber is now closed for about one month, and therefore the focus of debate shifts away from the House of Commons. With the move away from Westminster in place, it is yet unclear how the ‘remain’ and ‘leave’ sides of the UK political landscape will try to influence the issue.

The respective political parties will hold their customary party conferences where members have a chance to discuss and draw up party policy. This means the day-to-day business of government will take on a more ‘presidential’ style as Prime Minister Johnson and his team continue with their plans to leave on 31st October. The government now faces considerable legal barriers, which are intended to reduce the chance of a no-deal Brexit happening. The forex markets, in particular, will be studying the ever-changing landscape and noting any new developments.

Parliament reconvenes on 14th October, which leaves a considerable amount of time for markets to move in response to as yet unidentified levers.

Tuesday saw the tearful swan-song of speaker of the House, John Bercow, who addressed the chamber to announce he would be standing down from the role. The modern custom is for speakers to stand for eight years, but Bercow has continued in the position for 10 years.

 

Source: The Guardian

 

All Change

Whilst seemingly satisfied with his own endeavours, the speaker has sat over a House, which has over the last few weeks, seen the divisions within it brought to a head. Members of parliament such as Phillip Lee and Angela Smith have in the last week changed their allegiance from Conservative and Labour parties, respectively. Both now sit as members of the Liberal Democrat party. Other MPs who have moved to join the Liberal Democrats include Chuka Umunna and Luciana Berger who were also elected as Labour MPs in the 2017 general election. Their journey has been a longer one — they originally left Labour to form their own party ‘Change UK’ and then left that to join the Liberal Democrats. As the party most ardently Remain in viewpoint, as of yesterday, the Liberal Democrats found almost a third of their sitting MPs had not actually been elected on the party’s manifesto.

A total of 21 MPs who were elected to represent the Conservative party voted against the government last week and saw their membership of the party annulled — meaning they cannot stand for the Tories at the next election. The government’s majority in the House of Commons was at last count estimated to be minus 43.

 

GBPUSD

John Kicklighter, Chief Currency Strategist at DailyFX has been considering the political changes in the context of the GBPUSD currency pair.

GBPUSD — Price chart — Year-to-date

Source: Trading View

On Wednesday 4th September, sterling had its biggest single-day rally for over six-months. A tentative bullish patter is forming in GBPUSD, but Kicklighter’s analysis points out the triggers for it could both fall away. One reason for the reversal was the taking of profits by traders who had done well out of the long-term short-sterling trade. Rich Dvorak, junior analyst at DailyFX, gives reference to the Commitments of Traders (COT) report:

“It is worth pointing out that the sharp rally in British pound can be largely attributed to forex traders unwinding GBPUSD short positions suggested by the latest CoT report detailing speculative positioning.” 

Source: DailyFX

Source: DailyFX

The other catalyst for the GBP strength was parliament voting through legislation to reduce the chance of a no-deal Brexit happening. Kicklighter wrote:

“A more-than-three percent rally from the Cable offered a significant cushion to the bearish gravity that had built up and in turn hurdled more immediate technical boundaries that defined the bearish momentum of the past months.”

Source: DailyFX

Below is Kicklighter’s chart of the break out to the upside:

Source: DailyFX

 

Welcome relief

Regardless of personal views of the ‘accountability’ of politicians to the electorate, the events within the micro-climate of Westminster have changed the dynamic to such an extent that a break from proceedings will be welcome relief to many. Not least because the political realignments mean Johnson’s government is left without a working majority and therefore unable to pass any form of legislation.

Whilst the Prime Minister has lost six of his first six votes in the House, some historical perspective is also helpful. The current parliament on three occasions voted down the Working Agreement proposed by Theresa May’s government and two votes proposing a general election have also been defeated.

 

Noise and uncertainty

The closing of the doors to parliament does not make the Brexit situation go away. It is now quite unclear how the ongoing debate over Brexit will be played out.

The ‘conference season’ is a firm date in the political diary and was always going to require parliament being prorogued for a period of time. The major parties are hosting their conventions on 14th September when the Liberal Democrats travel to Bournemouth. Labour party members meet in Brighton between, 21st and 25th September and the Tories bring the curtain down in Manchester on 2nd October.

Public demonstrations and online campaigns are easy to envisage, and the major players in the debate will find no end of media coverage made available to them.

As the business of government continues, members of the Johnson team and related civil servants will continue with their day job of managing the Brexit process. It may suit the incumbent government to be away from the distractions of drawing up new legislation. They can instead focus on negotiating a deal with the EU and developing a manifesto for a likely general election.