Sterling's soft-Brexit boost nears limit

Prime Minister expected to rule out a no-deal Brexit in Commons speech

Developments so far this week

•          Prime Minister expected to rule out a no-deal Brexit in Commons speech

•          Follows on from confirmation that Labour is inching towards endorsing support for a second referendum

•          Labour unlikely to back an amendment to be tabled by backbenchers, Peter Kyle and Phil Wilson, in its current form. Amendment calls for MPs to support Theresa May’s deal in return for a second referendum

•          Labour expected to seek changes to the plan before backing it. Continues to focus on proposals for a permanent customs union.

•          Weekend reports flagged that Downing Street was already making contingency plans for a potential extension of the Article 50 negotiating period

Earlier, markets discounted those reports to a degree, given that they coincided with the latest delay of Theresa May’s promised ‘meaningful vote’. In general, fast-paced developments do appear to be rooted in Theresa May’s recognition that a past strategy to prevent Parliament from wresting control of Brexit is less likely to work this week. It is clear that odds for the amendment by Labour’s Yvette Cooper to pass when voted on, on Wednesday, have shortened. If it does pass, regardless of the replacement ‘meaningful vote’ promised by May no later than 12th March, the Brexit process will immediately take on a different hue.

Whilst huge uncertainty remains, sterling against the dollar has done severe damage to a range it has been contained in for about a week. This demonstrates that the market is becoming convinced that a softer-Brexit is on firmer ground. Still, with cable up more than a percentage point in less than two days and sterling stronger against the euro than at any time since last April, the key risk for markets is an overestimation of remaining momentum and perhaps an underestimation of remaining risks to the upside. A delayed Brexit does not equal a cancelled Brexit after all. Clues from options trades around 29th March remain ambivalent at best, a sign that the possibility of market mayhem from some sort of political upset has yet to be priced out.

Against the dollar sterling’s key technical chart watch is whether sufficient GBP/USD momentum remains to surpass and hold above the previous cycle peak of $1.3217. Failure to do so could come to be seen as a technical set back with significant consequences for the strong uptrend this year.

Technical analysis chart: sterling/U.S. dollar – four-hour intervals [26/02/2019 11:26:02]

Source: Refinitiv/City Index

Elsewhere, the long-standing paradox of British stock markets’ inverse attunement to Brexit should limit the downside for large exporters who shares tend to wilt when the pound surges. Sterling is among the best performing major currencies so far this year, presumably pricing in much of the expected benefit from a more favourable Brexit already.

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