Sterling resumes advance as BoJo to meet Mr Euro

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By :  ,  Financial Analyst

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.

Chart thoughts

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

Source: City Index

Related tags: Juncker Johnson UK Europe Brexit

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