No-deal Brexit threat is pushing the pound lower, reports Adam Button.
The British pound is off its lows against the U.S. dollar as are all currencies, but the cable was sent to a fresh 2.5-year lows after Boris Johnson's plan to force a showdown with the EU on a Brexit deal. Ashraf presents an alternate view below to the pound's decline in his tweet earlier today. Equity indices are down across the board after President Trump referred to a "problem with China" in the trade talks.
The Premium GBP short was allowed to be stopped out, while Thursday's euro trade (issued moments before the ECB) is currently 200+ pips in the green. Ashraf will lay out his pre-FOMC strategies and video in the next 20 hours. Look out for key US data on core PCE, home sales and consumer confidence.
Back to the conventional explanation
Johnson's cabinet continues to take a hard line on the potential for a hard Brexit. Michael Gove, chancellor of the Duchy of Lancaster, said the government is now operating on the assumption of a no-deal Brexit and new First Secretary of State Dominick Raab said they are 'turbo-charging' no-deal preparations and that the EU must change its “stubborn” position. Johnson reiterated that he will take the UK out of the EU on Oct. 31.
The FX market is beginning to think he's serious. The British pound fell 160 pips on Monday to as low as 1.2119 Tuesday morning. Johnson was meeting with the Irish government in the hopes of pushing them towards a solution on the backstop, but every public indication from all EU members is that the deal won't be re-opened.
Ultimately, parliament will have the final say and that will stop a no-deal Brexit but fears will be stoked in the meantime. Technically, cable has little support until the post-Brexit vote lows at 1.19 and EUR/GBP broke out to a 23-month high.
Elsewhere on Monday the market was remarkably stable as we await major data and central bank decisions (the most vital of which is Fed on Wednesday and Band of England on Thursday). The Bank of Japan— which faced a delicate balancing act as it aimed to sound dovish enough to halt a yen rally while not moving on rates— kept its policy settings unchanged overnight while cutting its inflation view.
Adam Button is co-owner and managing director of ForexLive.com and a contributor at AshrafLaidi.com. You can see Ashraf’s daily analysis at www.AshrafLaidi.com and sign up for the Premium Insights. Ashraf's Tweet on indices here.
