Some Quick Notes on Post Brexit Vote Trade

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Some Quick Notes on Post Brexit Vote Trade

by Kathy Lien, Managing Director of FX Strategy

Daily FX Market Roundup Jan 16, 2019

Prime Minister May’s Brexit deal suffered a big defeat yesterday in Parliament. She lost by 230 votes, which was her worse case scenario.

Instead of falling however GBP surged on the decision and is trading well above 1.28. As BoE Governor Carney pointed out this morning, the rebound in the currency reflects expectations that Article 50 will be extended and the prospect of no deal diminished. No one wants a disorderly no deal Brexit and the next step for May will be to lay out Plan B by January 21st.

But first, Labour leader Corbyn will be holding a debate of no confidence in the government beginning 13:00 and the vote will be shortly after 19:00 London time. Between 13:00-19:00, there could be quite a bit of UK headlines.

Having survived a no confidence vote last week, PM May is expected to succeed so the question really is what, is Plan B. Given the scale of the defeat, there’s no going back with small tweaks to the same deal. The March 29th Brexit deadline will need to be delayed, cross party talks will be held to see if a new plan can be developed or whether there should be a second referendum. The EU has been pushing for reversing Brexit but they also seem amenable to making further offers on the backstop. Either way, GBP is up because the most likely outcome is a soft Brexit or no Brexit at all. If she should lose the no-confidence vote, there will be a general election unless the government can win another confidence within 14 days. A loss could drive GBP/USD below 1.28.

The euro on the other hand has extended its decline for the 5th day in a row on the back of dovish comments from the ECB. Mersch and Nowotny spoke about the Eurozone’s slowdown and this sentiment is likely to be echoed by the ECB next week. But the worst performing currencies today are AUD and NZD. Softer credit card spending took NZD/USD back below 68 cents while the lowest consumer confidence reading in more than 3 years in Australia has AUD/USD testing 100-day SMA support. The U.S. dollar is up across the board with USD/JPY knocking on the door of 109. There’s no US data on the calendar this morning so the rise in yields and modest decline in stock futures is supporting the move. The Fed’s Beige book will be released later today.

Kathy Lien
Managing Director

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