What’s a Brexit Deal Worth?

Few hurdles remain on ahead of a Brexit deal and a smooth ride is unfathomable, but now is a good time to ask the question: What is a deal worth in GBP/USD?  GBP is again the day's top performer, becoming the 2nd stronger performer of the year. The latest from Brexit talks developments is a UK govt source indicating there will be no Brexit deal tonight due to unresolved issues with both the DUP and EU. But negotiations will continue this evening as other officials say technical talks are continuing and most issues are resolved apart from VAT.

The UK and EU appear generally to be headed towards a Brexit deal and the pound is cheering the move. It has surged in four of the past five trading days, while accumulating 650 pips over the last 7 days, surpassing the 200-day moving average and breaching a crucial 7-month trend line. Ashraf discusses the changing dynamics in yield differentials in this piece.   The latest moves also a 900-pip rally in GBPJPY.

Short-term indicators are deeply overbought, but short-term indicators are always overbought on a major shift in economic news so that may not be telling. In addition, positioning was extremely short GBP in the latest CFTC data and has been so for many months. Unwinding those structural positions will take weeks. The unwinding of long GOLD/GBP positions continues in earnest.

On the eve of the Brexit referendum, the pound was trading at 1.4250, incorporating a tremendous amount of uncertainty. Before the referendum had been called it was trading above 1.5000 and in 2014 it traded as high as 1.70. Thus, the question is to what extent has political uncertainty exceeded economic fundamentals?

At this point nothing should be taken for granted considering the remaining divisions in parliament and continued oppposition from the DUP. But these very obstacles suggest an upside target as high as 1.37 and later 1.40 in the event of a deal. And do not forget the BoE element, whereby the central bank could hints at rate hikes and/or the government offers fiscal stimulus.

PM Johnson is also pushing for a deal by this week, otherwise he will have to ask for an extension. Parliament will be open for a special Saturday session to hold a vote over a deal, which means that key trading decision will have to made ahead of the weekend.