How Much Further Could Pound Rally?

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Market Drivers October 18, 2019
Cable trades around 1.2900
CNY data stabilizes
Nikkei 0.18% Dax -0.01%
UST 10Y 1.76%
Oil $54/bbl
Gold $1488/oz
BTCUSD $7938

Europe and Asia:
CNY GDP 6.0% vs. 6.1%

North America:
No Data

In sharp contrast to last night’s wild swings, price action in FX today was considerably more muted as traders awaited the Brexit deal vote in UK Parliament on Saturday.

The eco calendar was barren across the sessions today with only Chinese data released during Asian trade. The eco data was mixed but generally stable with GBP coming in at 6.0% vs. 6.1% eyed while Industrial Production was markedly better at 5.8% vs. 5.0%.

The news helped keep Aussie bid which remained near 1-month highs on market view that trade war dynamics in China have generally stabilized and the labor conditions in Oz were good enough to keep RBA neutral for the time being. If there is any positive news on the US-China trade war front over the next week or so then AUDUSD could break out to fresh highs at .6900.

As to Brexit, the UK Parliament vote looks to be very close with pro-Brexit Labor MPs looking to be the key swing votes. A ratification vote would no doubt produce a knee jerk positive move for cable with the pair likely gapping above the 1.3000 level on the open Sunday night, but much of the good news has already been priced in as the pair is up nearly nine big figures off the lows.

One of the false assumptions in our opinion is that once the Brexit fog is lifted UK economy will see a renaissance of investment and rebound in growth. We think that’s inordinately optimistic given the fresh new barriers UK citizens will face and the general lack of growth on the continent as a whole. Furthermore, once unshackled from the Brexit quagmire, the BOE may, in fact, turn dovish rather hawkish if it feels that the banking system requires further liquidity to stabilize in a post-deal environment. The UK is one of the most indebted economies in the G-20 universe and now that it will be out of EU, its sovereign debt will be under much greater scrutiny as the country will need to rely even more on its capital account surplus to finance trade deficits which could expand even further.

For now, however, the focus will be strictly on the UK Parliament vote. If the vote should fail, the Brexit drama will only intensify as Mr. Johnson will be forced to ask the EU for an extension, but he has yet to confirm that he will do so. In any case, today’s compression in volatility in the pound is just a lull as massive moves are expected either way on Sunday open.

Boris Schlossberg
Managing Director

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