City Index | Sep 13, 2019 17:57
Optimism rises as Boris Johnson will meet Jean-Claude Juncker on Monday
As unwelcome for many as it may be, Parliament's 5-week suspension offers respite from the breakneck pace of political headlines that have stoked wild sterling volatility in recent weeks. Now, partly due to Britain's new anti no-deal Brexit law and the enforced pause, the pound builds on recovery highs notched when The Commons took control of the agenda away from Prime Minister Boris Johnson, whilst looking more stable than it has since the spring.
Sterling’s breakout coincides with a breakout of optimism, albeit slight, that a thaw in the impasse between Brussels and London may be beginning. PM Johnson’s first face-to-face talks with European Commission President Jean-Claude Juncker have been arranged for Monday. With no details—even the location—disclosed of ‘the working lunch’ so far, discussions are almost bound to be exploratory only.
“Exploratory discussions” are also underway about backstop alternatives between Ireland’s Prime Minister Leo Varadkar and UK officials, according to Bloomberg News. Yet Varadkar told the Irish Times a short while ago that the gap between the EU and the UK remains “very wide”. And chief negotiator Michel Barnier continues to drop strong hints that Britain has yet to table materially new proposals to bridge that divide. More broadly, EU officials continue to suspect that the UK is not seriously engaging whilst the clock runs down to 31st October’s deadline.
Even so, departing House of Commons speaker John Bercow has given his clearest indication yet that he’s prepared to continue setting procedural precedent if necessary, to ensure Johnson can’t wrest the UK out of the EU with no deal. As well, legal challenges against the PM are mounting, including over his decision to suspend Parliament and right to stage a no-deal Brexit, further reducing the market’s perceived risk of one occurring.
What the House does agree on however is the need for an early general election, even if opposition parties have prevailed to make the date no earlier than November. So although markets have expressed relief at dwindling chances of no-deal—for instance via a sharp slump in volatility implied by sterling options expiring in a month—tell-tale signs linger that an early election remains a concern. Such an event could increase political stability, or even re-shape Westminster in ways less friendly for the broader market and the pound. Two-month sterling implied volatility, covering possible election dates, continues to trade higher than one-month and one-week vol.
The biggest perceived risks to sterling have thereby shifted away from no-deal and on to early election prospects. As such, buyers are on the lookout for indications that alleviate those risks. These include firmer commitments that the Conservatives are ruling out a pact with the Brexit Party, and that a potential Labour majority would not be sufficient to form a standalone government. As the pound gathers pace on the upside, concrete signs of a Brussels-London thaw is still what sellers should fear most, and it remains remote.
Sterling’s possible base is clearly evident in trade against the yen. And in keeping with the notion that markets have largely exhausted a recent phase of broad risk aversion, prospects of a notable yen correction are higher than they’ve been for weeks. Sterling’s breakout from the down channel that lasted from late February till a few days ago is already eye-catching. The rate also pulled above short- and medium-term trends in the shape of 20- and 50-day moving averages (MA), objectifying the changed bias of sentiment. Buyers’ targets are fairly obvious. Momentum to significantly extend gains would be bagged if strongly marked resistance around ¥135.40/70 were taken out. It’s formed from the high (¥135.67) on the day before the yen’s July-August surge began, and one from the day after. It’s reinforced by a confluence of the MAs mentioned above. A move by the pair closer to the structure looks more certain than a break at this stage.
GBP/JPY – Daily
Written By: City Index
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
More markets insights, more alerts, more ways to customize assets watchlists only on the App
More content, faster quotes and charts, and a smoother experience is available only on the App.