CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Turbulent times ahead for UK politics and Sterling

The UK Parliament returns from its summer recess and is straight into the thick of it. A move by opposition MPs for an emergency debate and a vote to legislate against a “no deal” Brexit is taking place today. However, there are huge implications of this and markets are at a crossroads.

 

It seems likely that the vote will pass, with as many as 20 Tory rebels considering voting against the government. However, with Labour Brexiteer rebels, it will be an extremely close vote. Whether Boris Johnson (on Wednesday) can grab back the initiative from Parliament will be intriguing. His move is expected to be a call for a snap General Election (reportedly on 14th October, before the deadline for a “no deal” Brexit of 31st October). However, there needs to be two-thirds of MPs to vote for his proposed election (under the Fixed Term Parliaments Act). This may not be as easy to achieve as Johnson hopes. Apparently around half of Labour MPs (such as Peter Kyle) are thought to be against a general election. Furthermore, other opposition MPs such as Caroline Lucas (Green) are also vocally against it.

 

As Lucas lays out in her tweet, the issue is that MPs who are against the UK leaving the EU without a deal will not accept a general election (seen as Johnson trying to regain control) without the legislation to prevent a “no deal” Brexit being rubber stamped into law. So they probably would not back him. This means that, although the Labour leadership desperately want an election, there may not be enough support from the backbenches or other opposition parties (who see it for the trick it most likely is).

Also, even if they did, could Boris Johnson risk a General Election being held on 14th October if there was a legislated three month delay to Brexit beyond 31st October? It could be a move that massively backfires on the Prime Minister. He would then likely try to move to cancel an election.

So the prospect of an election is still massively up in the air. If Parliament can resist the filibustering and get into law a way of preventing no deal, then calling (and holding) an election could be political extremely risky by PM Johnson. Johnson would be able to go into the election saying that he is all for the democracy of delivering what the people voted for in the referendum, whilst the others are trying to go against the will of the people. However, with a second general election being held with Brexit still not delivered, it leaves huge uncertainties over whether Johnson would be able to win.

 

So what does this mean for sterling?

Could there be a massive short-squeeze? Markets have been massively short sterling for months now, as a no deal Brexit has been increasingly priced in. This morning we saw Cable slipping below $1.2000 but also briefly below $1.1980 (the January 2017 key post-Brexit low and apart from the October 2016 flash crash). Technicals remains deeply negative and the bears are in control. However, this comes with the prospect of political moves that leave Brexit at a crossroads.

Volatility on sterling options continues to soar. One month and three month Cable options volatility is rocketing. Traders are clearly worried.

Net sterling futures have unwound slightly in the past couple of weeks, but the market remains massively short. When Theresa May called a general election on 18th April 2017 there was a big short squeeze on sterling futures which drove a Cable rally. Could this be seen again?

 

Cable hit intraday multi-year lows earlier today but has already rebounded 80 pips off the lows. The technicals are not oversold, but this could be a significant crossroads moment for sterling now. Below $1.1980 on GBP/USD there is absolutely no real support so we would be talking about round number levels ($1.1500, $1.1000 or even parity). However, with the market so stretched it will not take much of a shift in outlook on Brexit to change the outlook on sterling. It is interesting that for the past three weeks there has been an unwinding on sterling futures positioning (whilst Cable has started to drop back to new lows. There is plenty of room for an unwind on sterling if the market suddenly had to rein in expectations of a no deal Brexit.

Richard Perry

Richard Perry

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