Brexit Day: Treat sterling with extreme caution - Comment

Brexit Day: Treat sterling with extreme caution

"At long last the day of the meaningful vote cometh. Theresa May's deal gets put to the test today with voting likely to begin around 19:00 GMT. Numerous amendments to the bill have been put forward. One of the most interesting of those, tabled by Hilary Benn, has been pulled already. Another that puts a hard stop on the backstop in December 2021 has a fair bit of support – but will it be enough to get the deal over the line? It seems unlikely still, which means we are about to enter a new phase of volatility for sterling. It would be wise to treat any sterling cross with extreme caution today.

Cable remains well supported above 1.28 having cleared the 50-day moving average but has come off the two-month highs above 1.29 as there is as yet no reason to bid up the pound beyond the psychologically important 1.30 level. EURGBP is testing key support on 0.89 having broken down below its 50-day SMA. The question is whether the imminent disorder is fully priced – it seems unlikely that the market really reflects where we are about to go on Brexit, albeit the lie of the land is more favourable for pound bulls longer term, i.e. a higher chance of a no-Brexit or very soft Brexit. Extension of Article 50 seems likely if this deal fails and Jeremy Corbyn manages to force an election. But similarly the no-deal risks rise by the day with March 29th just a couple of months away. As previously argued, the either of the extremes is still the most likely outcome.

Whatever the outcome traders should expect considerable volatility in sterling crosses today as the news flow dictates price action. The pound would likely rally hard in the event of the deal passing (unlikely). And while the consensus indicates the pound falling hard on a General Election being called, you could see such a scenario being bullish for sterling as it would imply a delay to Brexit and the possibility of a) a much softer version of Brexit than currently on the table, and b) raise the prospect of a second referendum. Whilst a fresh election would mean more uncertainty, and failure of May's deal could provoke wild short-term gyrations until order is restored, the implications are such that it may prove a positive for the currency in the medium to long term. Nevertheless, sterling is in for a rough ride whatever happens – tin hats time."

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