Sterling’s up and ready to swing hard
Ken Odeluga October 21, 2019 2:25 PM
The pound has become a broad risk proxy; all the more reason to watch for reversals
Having dipped at Sunday night’s open the pound is holding above the last few sessions’ lows. Prime Minister Boris Johnson will take another stab at getting parliamentary approval of his Brexit deal when the Commons sits from 2.30pm BST. Since being outmanoeuvred on Saturday by MPs seeking to ensure Britain won’t leave the European Union before 31st October without a deal, markets (and the press) appear more convinced that Johnson’s plan could scrape the necessary number of votes to pass.
Sterling is continuing its infrequent role of risk proxy as the Brexit clock runs down. Stocks most connected with the fate of British politics and economy were firm, just a little earlier, enabling the FTSE 250 index to lift 0.4%. The DAX index, which houses makers of the current best-selling cars in the UK, among other links, outperformed Europe’s major indices.
Markets only tenuously attached to Britain are positive too. A combination of global exporters and the very biggest British institutions kept the FTSE 100 benchmark two tenths of a percentage point up as another potential ‘crunch’ parliamentary session looms. Insurer Prudential rose 7%, partly as investors priced in a higher combined valuation from M&G which debuted as a separately traded entity earlier. Auto Trader and Centrica rose 3.5% each. Miners Glencore and Antofagasta both added 3%.
As per the last few weeks, increasingly confident and broad sentiment is exposed to unpredictable immediate developments and gnarly political procedure. For now, the Speaker of the House, John Bercow, who has form in frustrating attempts to expedite Brexit, is once again a fulcrum. There’s little indication whether he will veer towards the principle of preventing repeated votes on the same motion or will recognise the amendment on Saturday as a material enough change to the Withdrawal Bill, which of course was not directly voted on at the weekend. If Bercow allows a vote, but MPs attempt to amend it, Downing Street has signalled it will pull the vote for a second time.
Newly assured sentiment only goes so far. Short-term sterling volatility indicators continue to show that the cost of protecting against dangerous price swings is the highest it’s been for years. One-day ‘vanilla’ implied volatility rose 33.3% to the highest since June 2017. One-week trades, covering the days almost to the brink of the Brexit deadline, haven’t cost more since March 2009.
GBP/USD one-week at the money implied volatility [21/10/2019 13:54:12]
Investors still half believe that almost anything could happen over the next few hours. Positive though increasingly tense sentiment suggests the pound faces further buffeting in the event of further significant upsets on the path towards increased Brexit certainty. Still, so long as the impression of support holds for the current withdrawal bill, the pound, the euro UK and European indices could remain underpinned. If any vote is delayed till Tuesday, or perhaps even later in the week, it makes sense that some of those underpinnings could begin to fall away.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.