The pound’s sharp rally from the day before has come to an abrupt halt – at least for the time being. Rumours are circulating that 3 Conservative lawmakers are to follow the 7 Labour MPs and defect to the Independent Group later today.
It remains to be seen how the markets would react. But judging by this morning’s price action in both the currency and equity markets, investors may show a negative reaction if rumours are confirmed. So, both the pound and FTSE could be hit. This could potentially trigger a new wave of resignations and create more uncertainty. It will also reduce Prime Minister Theresa May’s majority in parliament. Even if the rumours turn out to be just that, rumours, we don’t expect the pound to move meaningfully higher until there is more clarity in the Brexit situation.
Theresa May’s government is continuing talks with the EU. Last month, UK parliament rejected May’s initial deal by a large margin, which has raised the prospects of the UK leaving the block without a formal agreement. The Tories want to make changes to the backstop arrangement, but the EU has continually insisted that they won't reopen the withdrawal agreement. So, the stalemate continues. But if and when Mrs May is satisfied she has come up with the best alternative plan, she intends to put this to the vote again. However, it is not clear when this will happen, and time is fast running out.
With the GBP/JPY being a more risk-sensitive pound cross, this pair is among the ones we are monitoring closely as we get closer to the Brexit date. The bulls will not like the fact it has reversed after a brief break above its January high of 144.85, with price also struggling to hold above yesterday’s large bullish candle. Admittedly, the day is not over yet, so things could change again later. Indeed, if rates push higher again and we close above 144.85 then this would keep the bullish bias intact. However, a potential close well below this level would leave behind a shooting star candle near resistance, and this would be a bearish development.
Source: TradingView and FOREX.com.