Pound bought for a date in December

Boris Johnson loses yet another vote for an election, though the Lib-Dems and SNP have blinked, so sterling stays firm

Does the EU’s confirmation of a three-month ‘flextension’ improve Boris Johnson’s chances of eventually gaining the two-thirds Parliamentary majority he needs to call an election? As far as we can tell, not much. As shown by the failure of the prime minister’s latest attempt on Monday night, the mathematics remain dicey.

Rather unsurprisingly, Labour earlier signalled that its support remains conditional on the complete removal of hard-Brexit risk, even now that the chances of Britain crashing out without a deal – this year, at least - have become almost non-existent.

Without Labour support, a separate scheme, backed by the smaller Lib-Dem and Scottish National Party opposition parties to force an election on 9^th December (three days before Prime Minister Johnson’s preferred date) may fail to win a majority as well.

However, the pound has seen a late European-session fillip linked to the Lib Dems stating that they would back a government move for an election on Monday 9^th December. So far, the government is sticking with 12^th December. However, the government confirmed after losing Monday’s vote that it would introduce a ‘short bill’, perhaps as early as Tuesday, regarding a general election. A bill would only require a simple majority, rather than a 2/3 majority. Lib-Dem/SNP support may hinge on the proposed date being brought forward by three days.

In practice, the precise date may just as likely prove to be a red herring. After all, there is far more evidence of Lib-Dem and SNP co-operation with Labour than with the Tories. On the other hand, those extra three days are expected to make the difference between Parliament returning from a general election this year and coming back in 2020. In case of the latter, as time runs out, accidental hard-Brexit risks could rise. Additionally, with the Lib-Dems and SNP being the only ‘official’ remain-supporting parties, and the Commons conditionally supporting Johnson’s deal, an early election may look like a last chance to bring Brexit to a halt.

As such, markets continue to read election prospects as high, enabling sterling to maintain an elevation near 5-month peaks. The chance of diminished uncertainties still seems to be trumping risks that an election could have consequences that may be deemed market unfriendly.

Chart points

• The pound is in the process of confirming the break out from last week’s wedge/flag on the bullish side
• GBP/USD has clawed its way above intermediate ~$1.284/~1.2865 resistance. It needs to hold above there to validate the continuation pattern
• If the rate can establish itself topside, classically, the measured length of last week’s consolidation could equate to initial gains; in other words GBP/USD could recoup the 2½ odd handles back to the $1.30 top and possibly beyond
• Conclusive failure should shift focus back to $1.2750 support, to begin with
• The RSI momentum gauge is inching higher, though is inconclusive in the daily view;  keeping an element of appropriate uncertainty

GBP/USD – Daily [28-10-2019, 19.30 GMT]

Source: City Index