Sterling rally lacks a backstop

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By :  ,  Financial Analyst

Sterling struggles to regain its poise as easy gains look to be over for now.

Looking through 29th March

For a spell, the market recaptured a decent chunk of ground ceded late on Tuesday, after Parliament voted on amendments to Theresa May's Brexit deal. Optimism has been bolstered by the passing of an amendment that rejects leaving without a deal. But the amendment is non-binding. Nor does it specify an alternative to ‘crashing out’ on 29th March. At the same time, by endorsing another amendment that seeks ‘alternative arrangements’ to the Northern Ireland backstop, MPs have sent the Prime Minster on a wild goose chase. The EU continues to take almost every possible opportunity to state that the Withdrawal Agreement is “not up for renegotiation”, to quote the European Council’s President Donald Tusk. He also drily noted that "The backstop is part of the Withdrawal Agreement”.

Just do it

As such, sterling’s mild bid against the dollar since late last night looks based on the view that rejection of no deal will galvanise the Prime Minister and perhaps Brussels to keep engaging. The tacit sub-text is that both successful amendments imply a longer negotiating period than expires on 29th March. Further amendment debates pencilled for 13th-14th February and Labour leader Jeremy Corbyn finally agreeing to meet Theresa May also bolster hopes.

Jolt risk

But after sterling's sprint of more than 4% over just 9 sessions on the perception that hard-Brexit risk was almost neutralized, there's now a decent chance the overarching narrative shifts to a less sure-footed one. The short squeeze since last year and falling option demand betray a level of complacency that participants could lose in a jolt as end-March nears. In the very near term, $1.3055 is spotlighted as an inflection point after selling lost traction there last night. Should that level give way in the short term, an acceleration of GBP/USD’s fall from last Friday’s almost 3-month highs is indicated.

Related tags: Corbyn May Forex Brexit GBP

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