Cable Me This [Video]

Background

The only question to ask yourself this week is how badly will the first Withdrawal Agreement vote fail in the house of Commons? According to the latest Bloomberg survey, there is on a 15% probability it will pass on the first attempt.

Why?

The vote on Wednesday morning is scheduled to cover the same Brexit Withdrawal Agreement handed down by Brussels and agreed upon by Theresa May in late November. The same Agreement that was never voted on in December after it became apparent it would overwhelmingly be rejected by the House. Thus the 15% probability it will pass Parliament.

GBP fell to its lowest level since November last week as the PM suffered two humiliating defeats on the floor of Parliament. The second vote, in particular, is the most humiliating for the following reason. If Wednesday morning’s vote falls, the PM has three days to amend the Agreement before it must be a vote on again. If this fails, Parliament can take effective control of the Brexit Agreement agenda basically making Theresa May a lame duck and will manufacture a new Agreement proposal.

Interestingly enough this should be a GBP positive, as it appears there is support across Parliament at large for “no Brexit” than for “no deal”.

GBP: wants to go higher but can it?

Since around the middle of December when the first vote never materialized GBP has remained stuck in a range. That in itself is interesting considering the USD weakness that has greeted us in 2019.

However, how this week’s vote pans out may offer clues as to the likely direction of GBP going forward. If there is a close defeat of the first vote leading to a ‘renegotiation’ that saw a second vote passing an agreement, this would be a clear positive however in Cable case this might actually be a strong mover considering the pair is one of the only pairs not to move on the USD’s weakness.

Conversely, a heavy defeat may be taken as a negative, as it would suggest no renegotiation could take place and the possibility of a no-deal or a general election would become the most likely scenarios, this would most likely push GBP lower, even back to levels not seen since July 2016.

USD: Still seeing the downside

Holding the line with my USD weakness call, you only have to look at the movement in the AUDUSD since the flash crash to see why (has moved through 5 cents).

The main reasoning is the consistent and collaborative communication from Fed officials. Clear examples of this:

In relation to the planned rate rises in 2019, Chairman Powell said: “the better way to think about it is that there is no such plan”.

Then on the balance sheet unwind, Vice Chairman Clarida said: “If we find that the ongoing program of balance sheet normalization…no longer promotes the achievement of our dual-mandate goals, we will not hesitate to make changes.”

Dovish Fed talk will mean dovish price action in the USD. The best test for this is if talk becomes action – this makes March very interesting. Short DXY call remains.