Brexit stakes have risen for both EUR and GBP

Forex 6 minutes to read

John Hardy

Head of FX Strategy

Summary:  GBP remains volatile as PM May's Brexit agreement dies on the vine, but EUR is another one to watch as the developing crisis retains large two-way risks.


The Brexit deal struck between UK Prime Minister May’s negotiating team and its European Union counterpart is more than clearly dead on arrival and will not clear the hurdle for passage in a parliamentary vote as currently formulated. But what this means for the path from here is far from clear.

Conspiracy theorists would have us believe that May’s team did the best it could with the obstinate EU and was willing to agree to something that they would take back to the UK and show to the EU that it wouldn’t fly. This could then provide some leverage for shifting the EU’s position on key issues to get a better deal through as we barrel toward the March 29 Brexit deadline. Cabinet resignations could be part of an effort at adding “theatre”.

The flip side conspiracy theory is that the EU is hoping (I would argue with bottomless hubris if so) to stand as firmly as possible in hopes that the UK will be disciplined into changing its mind and making “the right choice” via a second referendum, believing that it has the upper hand and the UK would never take the leap into the unknown.

Of course, both theories could be true to a greater or lesser degree and let’s not underestimate how a crisis can motivate further action and change the plot quickly in coming weeks. Also, let’s make no mistake that the EU is playing with fire here – a no-deal Brexit is not only very immediately disruptive for the UK economy, it would likely also throw the slowing mainland EU economy into recession – just ahead of EU parliamentary elections next May. High stakes, anyone?

Alternatively, we can attempt to take the situation at face value and merely ponder whether this will eventually mean a stumble toward a no-Brexit and the path that stumble would take: first a May exit and either a new election or a second referendum or both? Sterling has been sold steadily, but a 2% move is hardly indicative of the potential here and I think the “controlled weakness” with sharply higher implied volatility in the options market is an accurate reflection of the possible paths from here.

I still don’t have any idea how this will turn out, but have a hard time believing that the UK ends up on a path toward “opting in” to the EU again, just as I have a hard time believing that anything resembling this deal will make it through parliament because as Iain Duncan Smith aptly states “Theresa May’s Brexit plan concedes our sovereignty in a way even worse than if we stayed in the EU”.

The Brexit summit is set for November 25 and is the next event risk if May does not resign or is not ousted in the interim. An article from Politico takes a stab at looking how things may develop in the days ahead.

Elsewhere, the market is trying to put an optimistic face for the upcoming Xi-Trump summit at the G20 in Argentina. I am reluctant to trust any noise or signals from the Trump administration or certain Twitter accounts until we have a look at how the meeting goes down. Some sort of truce or détente may be possible here and could yet generate a flurry of excitement and risk-on sigh of relief. But longer term the die is cast as the two great powers will inevitably find themselves at odds with one other. We may not even see any notable breakthrough emerging from Buenos Aires. Trump’s only motivation to make friendly is his apparent barometer of his popularity – the stock market.

Chart: EURJPY

The JPY doesn’t know what to do here – it has risen versus EUR and GBP as the market has discounted those currencies on Brexit woes, but offsetting that has been an improvement in risk appetite on hopes that a US-China trade détente is on its way in a couple of weeks. Still, EURJPY trades heavily and a view lower encapsulates multiple angles on the FX market here: the risk of a hard Brexit, the re-aggravation of the Italy budget showdown and possibly even the US-China relationship souring again.

The technicals aren’t particularly compelling but it has broken down below the daily and weekly Ichimoku clouds and a break below 125.00 could set something larger scale in motion to the downside in coming weeks.
EURJPY (source: Saxo Bank)
Economic Calendar Today (all times GMT)

• 08:30 - ECB President Draghi to Speak
• 10:00 - Eurozone Oct. Final CPI
• 13:00 - ECB Weidmann to Speak
• 13:30 - Canada Sep. Manufacturing Sales
• 14:15 - US Oct. Indutrial Production
• 16:30 - US Fed's Evans (Non-voter) to Speak
Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Pty Ltd.
Level 25, 2 Park Street
NSW 2000
Sydney
Australia

Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Combined Financial Services Guide & Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.