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Brexit uncertainty – sterling falls below $1.20

  • High-stakes political posturing in Westminster increases the level of uncertainty in the financial markets
  • Tuesday sees votes in the House of Commons that might signal the next direction of travel
  • Cable forex pair breaks through $1.20
  • Technical analysis suggests that the door is now open to further downward movement
  • UK equity markets thrive on currency devaluation

The Brexit process somehow just got even more complicated. Traders in the City of London have been left wondering where the next surprise might come from. In neighbouring Westminster, political manoeuvring appears to have involved so much bluff and counter-bluff that some of the parties involved are not even aware of their own position. The confusion has weakened sterling, which has already broken through the $1.21 and $1.20 price levels this week and continues in a down-trend.

GBPUSD – One-day price chart

Source: TradingView

Reporting yesterday, BBC correspondent Laura Kuenssberg outlined the counter-intuitive nature of current political debate:

Source: Twitter

The situation in the House of Commons is that the currently formed Johnson government is the only possible combination of MPs that commands sufficient votes to form a government. While having (just) enough power to enact legislation on more day-to-day affairs, some individuals within the governing group are opposed to the proposed course of action regarding the Brexit process, limiting the government’s ability to proceed on this key policy item.

The stodgy stalemate could be resolved through a general election, but these are called on a fixed-term basis, and the next one isn’t due until 5th May 2022. Kuenssberg’s tweet introduces the concept of a vote of no confidence in the acting government being called as this is one of the few ways to trigger an election. The opposition Labour Party appear unwilling to go with that option, leaving the ruling government in the situation of forcing a vote of no confidence in itself in order to go back to the electorate.

Tuesday sees a group of cross-Commons MPs submit a bill to the House that would allow them to take control of the parliamentary agenda away from the acting government. That cross-Commons group would then be able to push back the Brexit deadline, with the proposed bill including clauses that would allow Britain’s withdrawal from the EU to be delayed months, years or even indefinitely. The vote on this bill will be tight and is being termed by the Johnson government as a vote of confidence in itself. Should it pass, a general election then becomes increasingly likely.

The BBC news analysts have provided a breakdown of Monday’s key events:

1) Boris implored his own MPs to back him over Brexit and to reject what he said was “another pointless” delay being proposed by Labour.

2) Downing Street told journalists that the government expected to table a motion to hold a general election on 14th October if MPs voted to take control of business in the House of Commons later today.

3) The government also upped the ante by threatening to deselect some of the most senior Conservatives in the party if they defied the party whip.

4) The MPs who are hoping to fast track a bill in the Commons revealed that they are contemplating a further delay to Brexit until (at least) 31st January 2020.

5) Meanwhile, across the Channel, the European Commission said that it was considering allowing EU countries to apply for cash to cope with a no-deal Brexit using a special emergency fund.

Source: BBC

 

Sterling slides

Monday saw Cable push down through the $1.21 support level that had until then provided significant resistance to further downward movement.

GBPUSD – ‘Prorogation rally’

Source: TradingView

Cable had held the $1.21 level despite last week’s news of the prorogation of parliament, but the political events of Monday finally triggered the drop in price. Trading below $1.20 on Tuesday, there now appears to be freedom to move lower. Charts with a longer time horizon show that the price has broken through its three-year low and it should also be noted that the gradient of the trend lines is getting steeper on the five-day chart.

GBPUSD – One-year price chart

Source: TradingView

GBPUSD – Five-year price chart

Source: TradingView

GBPUSD – Five-day price chart

Source: TradingView

FXStreet has provided a technical overview that could help provide a framework for those studying the potential price moves in GBPUSD. The FXStreet breakdown of price action/chart analysis suggests:

“A follow-through weakness below the 1.20 handle, leading to a subsequent break through October 2016 and January 2017 swing lows support – around the 1.1985-80 region – will further reinforce the negative outlook and accelerate the slide further towards challenging the 1.1900 round figure mark.”

Source: FXStreet

The analysis also considers how a possible move to the upside might come about.

Source: FXStreet

“On the flip side, attempted recovery might now confront some fresh supply near mid-1.2000s, above which a bout of short-covering has the potential to lift the pair beyond the 1.2100 handle, towards testing the 1.2115-20 horizontal resistance. However, any subsequent seems more likely to remain capped near the 1.2160-70 strong hurdle.”

Source: FXStreet

According to the analysts at LMAX Exchange Group, longer-term studies suggest that the market should look to reverse after reaching the $1.18 point but that it will take a break of $1.24 to confirm any bullish reversal. For those active in the market, that level of $1.24, where the daily Ichimoku Cloud hovers, looks some distance off at this moment in time.

Source: FXStreet

 

UKX

The flagship UK equity market, the FTSE 100, continues to rise on the back of sterling weakness. A lot of the companies listed in the index generate considerable revenues in foreign markets, so when the pound weakens, the returns from their non-UK business streams are greater in pound terms.

UK Index – (TVC:UKX) – Five-day price chart

Source: TradingView

 

Over the last five days, the index has posted a positive return of 3.16%

Today’s vote in the House of Commons could be a pivotal moment, and the only thing that all parties are in agreement on is that the outcome is just too tight to call.