Sterling tensions could ease till December

Summary

An extended Brexit transition period is unlikely, but sterling conditions could be relatively calm before a parliamentary vote.

Sterling under less pressure

We continue to view sterling pricing as optimistic. Note that it remains on the high side of the region that spans last Thursday night’s $1.2722 low and this morning’s $1.2879 high. Traded against the dollar, the pound drifted higher towards the end of last week and has not seen a serious upset since. This is largely due to a mixture of dollar consolidation, short-covering and the Brexit deal impasse itself—fresh developments have been limited.

Options reality check

For market participants, hedging and speculative option indications suggest positions remain costly to enter and hold. Nevertheless, demand for protection is robust. Sterling/dollar risk reversals from the shortest-term to those covering six months or more ahead are priced at the lowest since September 2016. This points to the most bearish expectations for the pound since the referendum. Friday brought the first lower close in in six sessions for key pound options across most maturities. But implied volatility in these trades, or how much sterling is expected to swing, is still close to the most elevated levels since mid-2016. In short, whilst it’s guesswork to state exactly when the pound will crater further, the bias obviously points to the downside.

Sterling weaker vs. euro

In the absence of any (highly unlikely) improvement in Brexit deal prospects and whilst UK government stability remains equally difficult to predict, the lack of a further slide by the pound towards its August low of $1.266 over the last week or so, will continue to look incongruous. Superimposing the chart of cable against that of euro/sterling (see Figure 1.) reveals a deeper discount of the pound since GBP/USD touched a new two week low on 15^th November. EUR/GBP pricing, which removes most reckoning about dollar sentiment, suggests GBP/USD could decline in the near term, to reflect a further, truer, deterioration in sentiment since late last week.

Monday reckoning

Monday did bring the largest downswing in the pound traded against the dollar since Thursday evening’s drama. Whilst there were no critical occurrences, the market was reacting to Prime Minister Theresa May stating that an extension of the Brexit transition deal was unlikely. The PM also noted it was important for the UK to be out of the implementation period before a 2022 general election. These were not surprising utterances. However, they underlined another element on which Theresa May has not changed her mind. As such, a potential confidence procedure on the Prime Minister is what traders should watch most intently. Our best assumptions are as follows.

Some sort of deadline for gathering the 48 MPs’ letters required to bring a confidence motion will occur at the end of today.
The tally was reportedly six letters short on Monday morning.
Failure to secure 48 letters on Monday reduces the chance of a vote before Sunday’s emergency EU summit.
In the event of a vote, 158 would be required to carry the motion.
If not carried, party rules dictate that no further confidence vote in the leader can be held for a year.

All of this continues to point to the parliamentary vote as the likeliest occasion when the agreement may hit a brick wall. Therefore, further incursions to the upside of the sterling range and even beyond are difficult to rule out. Optimistic scenarios could certainly gain traction in the market between now and the probable early December scheduling of a House of Commons vote. During that time, elevated option pricing could weaken demand, and hence implied volatility could also ease. Depending on the direction of the Commons vote, such easier sterling conditions would probably be temporary.

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.