The postponement of the key BREXIT vote has hit GBP/USD and put UK Prime Minister Theresa May’s political future at stake. Heading into year-end, there are plenty of risk events to keep volatility high and safe-haven currencies, especially JPY, bid.
An Unsuccessful European Tour
After postponing today’s key BREXIT vote in Parliament, UK Prime Minister Theresa May set off on a European tour to attempt to shore up support for a re-negotiation of the exit terms with European Leaders. So far, her attempt appears unsuccessful as both German Chancellor Merkel and European Commission President Junker have said no renegotiation is possible. Downing Street has said that the vote on BREXIT terms will now take place “on or before January 21”.
48 Letters Loom
Meanwhile, back in the UK, May’s own political party has begun to rebel. Some Tory members of Parliament have announced they have submitted their letters of “no confidence” in May. A “no confidence” vote will be triggered when 48 letters have been submitted. So far, 28 members of Parliament (“MPs”) have said publicly that they have submitted letters.
Pound Takes a Beating
When the December 11 BREXIT vote was cancelled, GBP/USD broke downside through support at 1.2700. With the news that no confidence letters were being submitted, GBP/USD moved lower still. (see chart). Today, traders tested the 1.2500 support – GBP/USD hit an intraday low of 1.2492. This was the first time GBP/USD traded below 1.2500 since April 2017.
Chart: GBPUSD (source: Bloomberg)
A decisive push below 1.2500 for GBP/USD may be the trade to end the year or start 2019. Macro traders love dates and we have been given the “on or before” January 21 notification date of the postponed BREXIT vote. Watch GBPUSD short term volatility – it jumped ahead of December 11 (the original date of the vote).
Chart: GBP/USD 1 week ATM volatility (source: Bloomberg)
JPY Strength Lurks
There are a heightened number of uncertainties for markets heading into year-end: They include: BREXIT uncertainty, protests in France, unresolved budget negotiation between the EU and Italy, and now President Trump threatening a possible US government shut down in December if he does not get funding for a border wall. With risk abound, JPY may also strengthen into year-end vs. USD, EUR and GBP – becoming the safe-haven currency of choice.
The chart below shows GBP/JPY – support comes in at 140.00 and then 139.14 area. One can see the move lower in 2016 post the BREXIT referendum result to 130.00 area and then subsequently to a low of 121.61.
Chart: GBP/JPY (source: Bloomberg)
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