Daily Brexit update: ‘Plan B’ is set to look familiar

Now for Plan B, but will it suffer a similar fate to Plan A?


Daily Brexit update: ‘Plan B’ is set to look familiar

And now for Plan B. But the day after Theresa May’s government survived a no-confidence motion, it’s tough to see how she could possibly come up with a plan that not so much as fits the Bill but makes it more palatable to the 432 MPs who voted against it. Either way, we now know that the next Parliamentary vote on the Bill will be on 29th January. And what else have we learned? Not much. Ahead of that vote and a debate that will precede it the same day, Theresa May wants discussions with political leaders, but there are conditions. These are:

  1. Commitment to deliver an orderly Brexit
  2. Protecting the union of the United Kingdom
  3. Giving Britain control of its borders and
  4. Allowing an independent trade policy (i.e., ending the customs union with the EU).

Understandably then, these talks will not involve Labour’s Jeremy Corbyn, at least for now. Nor is May budging from fundamental positions that have alienated various political factions throughout the process. So, it looks like her consensus-seeking strategy—which surely forms the basis of whatever Plan B turns out to be—is doomed. We will know for sure whether Plan B itself faces the same fate on Monday, when the Prime Minister delivers it to Parliament.

In the meantime, the Labour leader is edging ever closer towards endorsing a second referendum. Sterling sailed to the highs of the day after Corbyn told supporters that the party would “look at other options…including that of a public vote”, if the government continued to block Labour’s alternative to the extent that no-deal Brexit risk rises even higher. It’s already pretty high. Which is why a comment from Downing Street noting the government has not raised the idea of extending the Article 50 negotiating period with the EU is somewhat surreal.

Markets don’t do ‘surreal’, and uncertainty about what could become real takes us back to the crux of the dilemma for markets, 71 days before Brexit. Under these conditions, whilst sterling looks buoyant, this only goes so far. For one thing, clear offered phases have set in on three occasions that the pound against the dollar has approached $1.29, like now. Uncertainty combined with the spectre of a possible early election—Corbyn’s go-to preference for resolving the stalemate—suggests the handle will be a step too far again. Ambivalent sentiment tempers any comfort the market gets from receding hard-Brexit risk and the rise in the stock of ‘No Brexit’.

Technical analysis price chart: sterling/U.S. dollar – hourly intervals [17/01/2019 14:54:13]

Source: Refinitiv/City Index

We’ve talked about how we expect the market to play this low visibility with options quite a bit this week. One key thing to add is that sterling implied volatility, which shows how much turbulence the pound is expected to face, is diving from recent multi-month highs and taking premiums (option costs) with it. It’s largely a picture of dwindling demand. Given what we know and what we don’t know, declines in volatility expectations are likely to be short-lived.

How this affects our Brexit Top 10 markets:

GBP/USD: As expected, cable is getting tardy nearer $1.29. Unless a clean break is seen in the short term, a moderate reversal is likely. It could target $1.2877 initially, which was revealed to be sensitive in mid-November, at that time as resistance.

GBP/JPY: The ¥140 handle remains in play as psychology continues to contribute to the market’s ‘mental block’ around that region. Around ¥140.90 was the limit during forays in late-December, circa ¥140.70 more recently. The rate was near ¥140.50 just now.

EUR/USD: It’s clearer and clearer of late that the single currency is taking a break from Brexit. The upshot is that it lacks the uplift in sentiment currently enjoyed by the pound. After Monday’s deep upset, on data, early $1.14s cap. The short-term range bottom is about $1.137.

EUR/GBP: Including the pound, the euro is also coming off worst. Sterling was threatening resistance (for the pound) at 88.13p just now. We think similar dynamics as per the dollar apply and that a sustained break is unlikely. A reversal to EUR/GBP’s next key topside point, 0.88p, should occur sooner.

UK 100: FTSE and sterling rallies do occur together, but not often when sentiment threatens upside risk for the pound. The benchmark was down 0.8% a short while ago. Global stock sentiment isn’t helping.

Germany 30: The DAX barely fares better, losing 0.5%. Deutsche Bank in particular weighs after the ECB reportedly stepped up calls for a merger with similarly weak rival Commerzbank.

Lloyds: A slight uptick—0.2%—after Lloyds pledged to lend £18bn to British businesses this year.

Barclays: No such reward for more globally facing Barclays, which falls in line with the index.

Shell: Similar picture for the world’s No.2 supermajor which falls 0.9%.

BP: BP loses 1% after subsidiary Aker BP proposed aggressive dividend hikes.


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