Daily Brexit update: Theatre of the absurd keeps sterling in strong focus

After Tuesday's theatre of the absurd in Westminster, Brexit has moved higher up among broader priorities.

Daily Brexit update: Theatre of the absurd keeps sterling in strong focus

Our perception is that after Tuesday's theatre of the absurd in Westminster, Brexit has moved higher up among broader priorities. It has not been as major a concern for markets outside sterling throughout the year. Note the capability of broader risk appetite to shrug off prior episodes of UK political rancour. But with the pound against the dollar and euro forced out of three-week ranges and back into heightened volatility, higher risks and more opportunities, mean sterling is no longer near the back burner. This underscores caution overall. Note the pound’s supine reaction to the strongest pay growth in a decade. True, cable had already snapped 130 pips up from Monday afternoon’s collapse. But that move was a clear retracement of Monday’s fall, suggesting short covering. An underlying static reaction to strong data is the key takeaway.

With Prime Minister Theresa May on her way to Brussels after calls with senior EU leaders, a lilt of supportive sentiment is abroad. But for sterling and for the wider asset picture, Brexit remains a mostly unappetising moveable feast. The bloc has telegraphed its position clearly. Weak probabilities consequently mean poor risk/reward. Don’t expect sterling to break decisively higher under these conditions. Note, implied volatility dips for one-month options whilst rising in nearer-term trades; such as for one and two weeks. At the same time, it’s reaching fresh 18-month peaks in 2- to 3-month contracts. This shows provision is being made for a febrile rest of December but that the most punishing whipsaws are expected as Britain approaches exit.

How this affects our Brexit Top 10 markets:

GBP/USD: it would be remarkable if the pound against the dollar retook a prior region of long-term defence around $1.266, without miraculous good news. It was the 14th August launch point for cable’s last major foray. Furthermore, price has toyed with that line numerous times since 2016’s referendum. We’d expect a return back to $1.2513 support established in April last year before a peek above $1.266.

GBP/JPY: The key struggle here is again 142.75 yen per pound. This time though, the pressure is on sterling as the rate’s corrective bounce faces visible resistance there. Declining moving averages and a largely neutral RSI oscillator suggest a lack of traction and ultimate failure to take key resistance anytime soon.

Technical analysis chart: sterling/yen spot - daily intervals (11/12/2018 14:42:34)

Source: Refinitiv/City Index

EUR/USD: As I write, the single currency is returning gains from its own lift off late-Monday lows near $1.1347 to $1.14 dead at midday in London. Earlier, a strong U.S. producer prices print underpinned dollar conditions further. Support is likely around $1.135 again. ECB currents will soon be active too. There are decent chances that Mario Draghi will need to discount a weaker oil price in inflation forecasts on Thursday, weighing on euro. The main question is how far any reduced forecasts are already priced in.

EUR/GBP: An elastic sterling bounce dragged this pair some 85 pips off Monday’s .9088 high, before it gave back 35. At last look, sterling was at .9010, largely static with its late morning high.

UK 100: Trump tweets lauding prospects of a trade deal and reports that China could lower car tariffs underpin global markets, including the FTSE. It was last up 1.9%.

Germany 30: Germany’s auto stock-laden benchmark posts the biggest advance among large European markets. The index remains some 4% lower over 5 days and is down 16% this year.

Lloyds: Could Lloyds be the purest Brexit proxy? It was a more congruent looking 0.2% lower just now.

Barclays: With faster growing assets stateside, Barclays’ bounce is in line with Wall Street.

Shell: As traders attempt to square OPEC’s modest cut with assessments of demand, Brent crude is flitting in a range; currently up 1.8%. Shell is up 1.9%.

BP: BP outpaces the FTSE’s biggest oil stock with a 2.6% rise. Added impetus comes from a favourably priced concession in Egypt.

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