The past few days of Brexit negotiations have left us with little besides the odd soundbite in which two sides are either ‘making progress’ or ‘obstacles remain’ towards an exit arrangement. Ludicrously, Sterling has jumped at every provocation, using each new headline as a source of volatility. This only serves to reinforce our view that markets’ desperation for positive news outweighs the reality of the situation. Who cares if we’re close to a brokering a deal when the real question is whether that deal is popular enough to get through Parliament? Therefore, we need to dig deeper than official comments. Boris Johnson has a slew of political counterparts—each with their own self-interest at heart—and it’s a delicate balancing act appeasing one without alienating another.
So, let’s look at the Democratic Unionist Party (DUP), which represents the interests of Northern Ireland through its 10 MPs. The DUP’s red-line has always been a backstop arrangement that firstly, keeps the UK in the EU customs market or single market, and secondly, allows an individual nation to exit separately from the collective necessitating borders within the UK. The fundamental issue at play here is that the DUP doesn’t trust Boris Johnson to uphold both points. The situation is made worse when it’s clear the deal was brokered at a cosy meeting between Johnson and Irish PM Leo Varadkar last week. It looks as though Johnson’s proposal is to sacrifice Northern Ireland to EU customs rules to avoid a hard border on the island of Ireland. The government could offer Northern Ireland a bigger budget to entice them to support a deal, but it’s an argument fundamentally in contradiction with the premise of Brexit: EU customs rules stifle self-determination and aren’t desirable.
Johnson also needs the support of conservative European Research Group (ERG) ministers to gain a Parliamentary approval. This should pose less of a problem as these ministers are more inclined to side with Johnson than his unfortunate predecessor, Theresa May. ERG chairman, Steve Baker, commented yesterday that optimistic talks with the government should lead to a deal they can support. Remain-alliance MP’s – most of whom voted for Theresa May’s deal – are broadly motivated to vote for any deal that avoids an abrupt UK departure from the EU on October 31st.
Bottom line: Negotiators have underplayed the minefield of obstacles which must be negotiated to reach a deal acceptable to all parties involved. As such, the Pound is susceptible to a retracement of all of last week’s gains and more. There’s still the slim possibility that negotiators will broker a deal that isn’t supported by the DUP. In this scenario, Johnson would bank on MPs voting for any agreement that avoids Brexit becoming the ever-lasting saga.
In yesterday’s session, Sterling extended gains once again amid increased Brexit sentiment. The pair reached highs of 1.28 before settling around 1.2750 overnight. In the London open this morning reports the UK government was downbeat on securing a deal sent the pair back below 1.27—through the 200-daily moving average of 1.2713. Intraday volatility should be expected in today’s session as Brexit headlines are published.
Sterling’s rally in yesterday’s session sent the currency cross to highs of 1.1595 before settling overnight. This morning’s Sterling sell-off has sent the pair back towards the 1.15 handle; however, downward pressure is limited by a stronger Euro. The pair’s 50-daily moving average is crossing above the 100-daily moving average today, so a closing price higher than today’s open could support the pair in future sessions. However, the ongoing Brexit drama is likely to remain the more significant price mover.
The common currency continues its steady climb in October, following a clear trend channel. The Euro traded just shy of its 50-daily moving average on the London open, which may provide some resistance for the pair as it continues to trend higher. Eurozone inflation data this morning, as well as US consumer figures this afternoon, could steer the direction of the pair today – particularly the latter data point as investors assess the economic the strength of the US consumer amid a deteriorating economic outlook.