Pound Gains Despite Cabinet's No-Deal Warning

Pound Gains Despite Cabinet's No-Deal Warning

XTB  | Jun 12, 2019 11:54

There’s been more upside seen in sterling this morning with the pound building on Tuesday’s appreciation and trading not far from a 3-week high against the US dollar.

While this short-term move is welcome, the longer-term direction of the pound remains heavily reliant on what happens next with Brexit and there remains a feeling that the market is underestimating the risk of a no-deal scenario.

Boris Johnson, the heavy favourite to become the next PM has promised to take Britain out of the EU with or without a deal on October 31st, and if he is as good as his word then the risk of a no-deal is rising. After MPs effectively blocked the threat of a no-deal a few months back the pound rallied as traders began to see Theresa May’s deal as the worst-case scenario. However, given the time restraints until the end of October, this outcome or a similar variation is now looking like the best possible outcome and as such could well provide a ceiling to any significant moves higher in the pound for the foreseeable future.

Cabinet note warns UK not ready for no-deal

A leaked cabinet memo this morning has served as a timely reminder of the disruption that would ensue in a no-deal Brexit, with the document reaffirming the notion that the UK is still far from ready for this eventuality.

The note suggests that the government needs 6-8 months of engagement with the pharmaceutical industry to ensure stockpiles of medicines are in place and at least 4-5 months to mitigate disruption caused by border checks. Even if plans were put into place at this very moment it would be touch and go whether they would be sufficient to minimise disruption, and with these contingencies unlikely to being for at least a month there is a sense that time is getting away the best we can hope for is damage limitation.

Oil back under pressure

After a relief rally last week that saw a strong bounce higher in the price of crude oil, the market is coming back under pressure with international benchmark Brent lower for the third day in a row and not too far from the 4-month low made last Wednesday.

The oil price is lower by more than 2% on the day following an unexpected build in last night’s API inventory data from the US which showed an increase of 4.9M barrels in the past week. This afternoon the more widely viewed government data will be released and if there is a similar size increase then we could well see a retest the recent lows and drop back below the $60 per barrel mark.

XTB

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