Daily Brexit update: May faces ‘No Confidence’ though markets have lots

For the second time in two years the British government is on the brink of collapse, but markets are, overall, buoyant.

Daily Brexit update: May faces ‘No Confidence’ though markets have lots

For the second time in two years the British government is on the brink of collapse, but markets are, overall, buoyant. That includes sterling. After slumping to a new 20-month low early on, it has surged. That’s partly due to profits being realised on short trades. There’s also optimism on the fate of Theresa May with bookies pointing to a strong chance that she will win a no confidence vote tonight. More to the point, markets are factoring in higher chances of a more favourable Brexit deal, or even no Brexit at all.

How this affects our Brexit Top 10 markets:

GBP/USD: The pound traded against the dollar was up some 140 pips from latest 20-month lows just now. Much of the move reflects profit realisation, but the motivation for short sellers to cover now is instructive.  It reflects a growing assessment that worst-case risks are decreasing. Still, the technical price chart of sterling traded against the dollar below shows the market is now well within the range where selling has been most intense this week (see ellipse). The probability of clearing $1.266 resistance, sustainably, looks quite low. Technical and fundamental overhead pressure are well baked-in. Options are projecting that the biggest swings in the pound for over two years could be seen sometime between today and over the next three months. Hence, despite optimism, sterling could yet set fresh 20-month lows and worse in the near term.

Technical analysis chart: sterling/U.S. dollar – two-hour intervals: [12/12/2018 15:42:26]

Source: Refinitiv/City Index

GBP/JPY: Sterling’s most volatile pair is now ironically 0.5% higher for the week. What’s more, the pound is sitting pretty above former resistance at ¥142.75. We didn’t expect that to give way so quickly. Everything about the pound suggests it remains under considerable pressure and that its upward reflex will fade before long. The key 21-day exponential moving average (EMA) is dipping and trades at ¥144.31, close to last week’s consolidation highs. These could now be targets for buyers. Objectively though, the EMA shows the weight of prevailing sentiment remains against the pound.

EUR/USD: This market appears to have ‘decoupled’ from Brexit in recent days. Unlike sterling pairs, its three-week range is largely intact. New-found relative immunity to the EU-UK divorce is likely to be fleeting. Still, the first catalyst to push the single currency higher or lower is more likely to be the ECB after the central bank’s statement and commentary on Thursday.

EUR/GBP: One of the few major pairs in which the pound is falling hard. A 60-pip loss slashes about half of the pound’s gain this week. Talk is rife that Italy could impose a lower deficit target. If so, it would be one of the biggest fundamental boosts the single currency has seen for months, albeit from anticipation alone.

UK 100: The FTSE last stood 1.3% higher having strengthened steadily since open. Only around a tenth of its shares have traded lower on Wednesday. Of these, most are down less than 1% and are reacting to concerns unrelated to Brexit. The biggest driver of the rebound across global markets like the FTSE is that investors are beginning to buy Washington’s take on trade talks.

Germany 30: Assurances from Trump on trade boost a clutch of giant carmakers listed on the German benchmark. In fact, all of the market’s large industrial groups are elevated.

Lloyds: If Lloyds is as accurate a gauge of sentiment on British equities as it often seems to be, its solid 1.7% rise at last look points to a strong expectation of good news.

Barclays: Barclays is benefiting from the best of both worlds: Brexit and trade, lifting the stock as much as 3% on Wednesday.

Shell: Good weekly oil inventory readings keep a floor under oil prices, but much uncertainty remains. Shell was up just 0.3% just now.

BP: Having outperformed Shell for a few sessions, a small fall on the day by the No.2 oil company makes some sense.

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