What's a Brexit Deal Worth?

10/17/2019 11:00 am EST

Focus: FOREX

Adam Button

Co-Owner and Managing Director, ForexLive.com

The British pound continues to rise as odds of a Brexit deal rise, notes Adam Button.

A few hurdles remain ahead of a Brexit deal and a smooth ride is unfathomable, but now is a good time to ask the question: What is a deal worth in GBP/USD? 

The British pound (GBP) is again the day's top performer, becoming the second strongest currency performer of the year. The latest from Brexit talks developments is a UK government source indicating there will be no Brexit deal Wednesday night due to unresolved issues with both the Democratic Unionist Party (DUP) and EU. But negotiations will continue this evening as other officials say technical talks are continuing and most issues are resolved apart from VAT. 

The UK and EU appear generally to be headed towards a Brexit deal and the pound is cheering the move. It has surged in four of the past five trading days, while accumulating 650 pips over the last seven days, surpassing the 200-day moving average and breaching a crucial seven-month trend line. Ashraf discusses the changing dynamics in yield differentials in this piece.  The latest moves also a 900-pip rally in GBPJPY.

Short-term indicators are deeply overbought, but short-term indicators are always overbought on a major shift in economic news so that may not be telling. In addition, positioning was extremely short GBP in the latest Commodity Futures Trading Commission Commitments of Traders (COT) data and has been so for many months. Unwinding those structural positions will take weeks. The unwinding of long GOLD/GBP positions continues in earnest.

On the eve of the Brexit referendum, the pound was trading at 1.4250, incorporating a tremendous amount of uncertainty. Before the referendum had been called it was trading above 1.5000 and in 2014 it traded as high as 1.70. Thus, the question is to what extent has political uncertainty exceeded economic fundamentals?

At this point nothing should be taken for granted considering the remaining divisions in parliament and continued opposition from the DUP. But these very obstacles suggest an upside target as high as 1.37 and later 1.40 in the event of a deal. And do not forget the Bank of England element, whereby the central bank could hint at rate hikes and/or the government fiscal stimulus.

Prime Minister Boris Johnson is also pushing for a deal by this week, otherwise he will have to ask for an extension. Parliament will be open for a special Saturday session to hold a vote over a deal, which means that key trading decision will have to made ahead of the weekend.

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.

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