GBP risks increase as Brexit minister resigns

Forex 5 minutes to read
John J. Hardy

Chief Macro Strategist

Summary:  The resignation of UK Brexit minister Dominic Raab has weakened sterling this morning as this dramatically escalates the risk of a chaotic situation ahead of the March 29 Brexit deadline.


Note: just before going to press we get the news that Dominic Raab, the UK Brexit minister has resigned – this obviously heavily colours the Brexit discussion of today’s post and dramatically raises the risk of a Prime Minister being ousted or resigning. 

The situation with the draft Brexit deal is very fluid at the moment, as UK Prime Minister May has to survive the risk of a party revolt in the very nearest term and even if she does, faces the risk of an inability to ram the deal through parliament if a large contingent of the Tory “ERG” rebels vote against. The Northern Irish DUP party has already made clear that it feels betrayed and will not vote in favour.

The deal itself does offer the UK essentially what it wanted: a customs union deal with no freedom of movement for immigrants, but the Tory hardliners see the deal as a loss of UK sovereignty because they have lost a vote in the EU and not gained enough elsewhere.

The EU has now gone as far as setting the date for a dedicated Brexit summit for November 25 to formalise the deal, which will then require a parliamentary vote some time in December, but the question is whether the deal is dead on arrival at that vote. 

The Labour gambit is to hope that the Tories self-destruct and they can swoop in and take power in an election and perhaps call a second referendum (I don’t get this – many Brexit voters are traditional Labour voters). Corbyn has offered no credible alternative Brexit vision and looks like a pure opportunist here. It’s all a mess and we have to boil it down to roughly three potential paths from here:

The May miracle: Theresa May survives the confidence vote and engineers a miracle, perhaps ramming through a key few changes to the deal at the Brexit summit  on the 25th to keep the language sufficiently vague on future negotiations to keep most of her party on board, meaning only a few Labour Leave votes are needed to deliver the Brexit under this deal. The threat of chaos could move the EU on key points if it is clear that the deal won’t pass as currently written.

May survives, but the deal doesn’t: In this scenario, the Tories fail to mount a challenge to May’s leadership and the Brexit summit moves forward, but the eventually deal fails a parliamentary vote. This creates an ugly situation as time is running short into March 29, and might require an emergency extension of the exit date to avoid the embarrassing spectre of customs inspections and goods (think especially food and medicine) shortages in the UK.

May is ousted or May resigns: this would throw the situation immediately into chaos, with snap elections likely on the menu and the status of the entire Brexit deal thrown into doubt – this is the most immediately sterling negative (as the question arises – is this a "either no-deal exit or Corbyn government”. 

And one word of warning on sterling upside potential – if we do end up with the prospect of a Corbyn government, this could quickly curtail sterling upside potential even if a path reemerges of avoiding Brexit (can’t see how this is possible) on the concern that the reddest government since the pre-Thatcher era would prove an economic disaster.

Elsewhere, we have a rather weak US dollar on our hands as Fed rate hike expectations have been lowered a few notches, at least in part on yesterday’s tepid US CPI report (and the idea that lower oil prices will feed slower inflation in coming months) and on a Powell speech yesterday at the Dallas Fed. Some saw Powell’s speech as a change of heart as he enumerated a number of risks from here, but his description of the current economy and financial conditions suggest still strong optimism and satisfaction with the Fed’s current policy as he said that balance sheet reduction is going “very well”.

Chart: AUDCAD

AUDCAD has seen a remarkable run from near 0.9100 to 0.9600+, in part on an unwind of crowded AUD speculative shorts as the market hopes we are headed toward a US-China trade deal, but also on the ugly sell-off in oil prices that has weight on CAD in the crosses. The bounce looks justified, but I would suggest it is getting overdone unless we see a more profound improvement in the US-China relationship than I am anticipating in the wake of the Xi-Trump meeting at the G20 in a couple of weeks. For now, we’ll watch for signs of mean reversion in this pair, something that it has a history of doing. 

Source: Saxo Bank
The G-10 rundown

USD – US dollar upside pushed back on the unwind in Fed expectations of the last couple of sessions – but not yet convinced that there are legs on this move. 

EUR – yes, EURUSD has squeezed back above the clear 1.1300 level that was the former support, but the pair is still in a descending channel and the bear doesn’t look fully challenged unless we pull all the way back above 1.1500. Any ugly Brexit chaos scenario could well rub off on the euro to a degree as well – and we still have the Italian budget sword of Damocles hanging over the EU.

JPY – USDJPY still within the range – we will likely need the market to revert back to pricing more Fed rate hikes to get any liftoff potential above the key 114.50 level. The chart is boring unless we challenge below 112.00 again.

GBP – sterling weakening as the resistance to the current deal is quite clear from Tory hard-liners and the DUP. Sterling will have a hard time putting in a convincing rally in the near term if it is feared that the choice is the Scylla and Charybdis of “no-deal Brexit” vs. Corbyn government.

AUD – the solid jobs report overnight adding to the AUD squeeze – this move looks very mature in some of the crosses, but there could yet be more upside short term if Trump and Xi manage to chum it up in Buenos Aires at the G20. Further out, this won’t stop the ugly unwind in the Australia housing market.

CAD – USDCAD trying to maintain altitude for a go at the sub-1.3400 highs for the cycle, but the volatility of the US-CA rate spread has been uninspiring.

NZD – kiwi relative strength versus the AUD may have been ended by this latest jobs report – certainly yesterday’s lows near the huge AUDNZD trendline are the line in the sand for the bullish hopefuls.

SEK – the krona so far surviving the slightly weaker CPI print – a cut well back below 10.25 could yet regnite hopes for a follow through lower into 10.10-10.00

NOK – can EURNOK rally hold given Brexit situation and now that oil prices may consolidate? 

Upcoming Economic Calendar Highlights (all times GMT)

0930 – UK Oct. Retail Sales
1000 – Eurozone Sep. Trade Balance
1310 – ECB’s Praet to Speak
1330 – Canada Oct. Home Price Index
1330 – US Nov. Empire Manufacturing
1330 – US Nov. Philly Fed Survey
1330 – US Oct. Retail Sales
1330 – US Weekly Initial Jobless Claims
1400 – Canada Oct. Existing Home Sales
1500 – US Fed’s Quarles (Voter) to testify on banking supervision
1530 – US Weekly Natural Gas Inventories
1600 – US Weekly DoE Inventories
 

Quarterly Outlook 2024 Q4

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Head of FX Strategy

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Head of FX Strategy

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...


Business Hills Park – Building 4,
4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

Contact Saxo

Select region

UAE
UAE

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.