Cable Rebounds but Uncertainty Prevails

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Market Drivers October 12, 2016
Cable spikes on Parliament debate on Brexit
Euro drifts towards 1.10
Nikkei -0.06% Dax 0.01%
Oil $50/bbl
Gold $1257/oz.

Europe and Asia:
EUR EZ IP 1.8% vs. 1.1%

North America:
USD FOMC Minutes 14:00

The pound staged a massive rally in Asian session trade today rallying more than 150 points in a matter of minutes on news that PM May will allow some Parliamentary debate on the terms of Brexit.

The UK Labor party provided the Prime Minister with a list of 170 detailed questions about everyday issues such as telephone roaming charges that would be affected by UK’s exit from the European Union. The Prime Minister agreed to limited debate on negotiating terms, but critics were quick to point out that the debate in Parliament will be non-binding and that this maneuver was in no way, shape or form an attempt to allow Parliament say over the actual invocation of Article 50.

Regardless of the details, the news was positive enough to stoke a very sharp short covering rally after four days of relentless selling. Cable rose to a high of 1.2326 after hitting lows of 1.2090 in yesterday’s New York trade. The key questions that the market will focus on now will involve the terms of negotiation with EU, colloquially known as “soft Brexit” versus “hard Brexit” under the conditions of the former UK may preserve much of its trading links with the Continent and most importantly may be able to maintain its place as the financial center of the world.

If UK were to maintain close ties to the EU market it may be forced to pay as much as 5 Billion GBP per year in market access fees. This would be 60% of its current 9 Billion GBP obligation but is still a considerable sum of money that Brexit proponents never mentioned in their campaign.

After the massive volatility of the past few days GBP/USD may begin to settle a bit as the political process starts to churn. The pair is now contained in the broad 1.2000-1.2500 range and is likely to remain there until the terms of the negotiation begin to clear to the market. There is no doubt that the message of the market over the past few days has made a resounding impact at Whitehall and PM May’s more conciliatory tone may be a sign that the UK government will take a softer stance in the negotiations going forward.

Meanwhile the dollar remains well bid especially against the yen and the euro with the later now approaching the key 1.1000 level that has not been broached since the post Brexit spike lows. US 10 year yields remain above 1.75% mark providing the fuel for the rally. Today the market will get a glimpse at the FOMC minutes and if the prove supportive of the December rate hike scenario then the greenback could push higher as the day proceeds with EUR/USD challenging 1.1000 level and USD/JPY pushing to test the 104.00 figure.

Boris Schlossberg
Managing Director

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