Could Departure Of Lame Duck May Set Stage For Rebound In Pound?

U.K. Labour leader Jeremy Corbyn has just announced the breakdown of Brexit talks with PM Theresa May’s Conservatives. May blamed it on pisions in the Labour Party. This sets set the stage for her departure, whether or not a Brexit withdrawal agreement passes in the first week of June. Could this eventually set the stage for a rebound in the pound as it fell once again Thursday. All currencies are down against the USD with the exception of the yen as risk dips back down. Monday’s long DOW30 Premium trade was closed yesterday at 25870 for 450-pt gain. The other index trade remains open.

GBPUSD Daily Chart

The final act of Theresa May’s leadership of the U.K. will take place in early June as she makes one final effort (effort # 4) to forge a Brexit deal. She had previously pledged to leave after a deal on a meaningful vote but now she will try to score a win on a withdrawal bill. According to 1922 Committee chairman Graham Brady, May will leave regardless of the vote’s outcome.

It appears to be a lost cause with Labour and the ERG already lining up against it. Labour is even reluctant to engage in futher deal talks with May because they believe any deal may not survive a leadership challenge. That leaves little hope of any political tailwinds until May officially quits.

Pound vs Volatility

The turmoil and uncertainty has sent cable lower in eight of the past nine days, including a half-cent fall on Thursday to the worst levels in three months. At this point the market will grab onto any positive signs or developments but a leadership challenge will add new risks. The better hope for a near-term rebound may be better economic data. Note in theabove chart how sterling implied volatility has remained suppressed despite the currency’s free-fall. Does this imply the lack of surprise element? Will volatility pick up when (if) May leaves? Ashraf tells me he sees the final support 1.2650/70 on a closing basis before a sharp move higher.

On that front, there were positive signs Thursday in North America. U.S. housing starts and the Phily Fed beat estimates, leading to a rebound in USD/JPY. Canadian ADP employment data was also extremely strong in what should be confirmation of the official jobs report released last week.

U.S.-China Trade talks remain the dominant story in the backdrop and markets were positive Thursday but there was some worrisome news. China struck a defiant tone saying it will never make concessions in important matters of principle. Reports also said that the U.S. is asking the EU and Japan for auto quotas that are likely to be seen as unacceptable and in violation of WTO rules.

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