Sterling Has Neither Politics Nor Technicals Going for It
What a difference a Brexit deadline has made to the pound.
Euphoria over Prime Minister Boris Johnson’s landslide win sent it to the highest close since March on Monday. A day later, it suffered its worst sell-off in more than a year after he announced plans to set a Brexit deadline of December 2020. It lost as much as 0.4% against the dollar on Wednesday.
To make matters worse for cable, it completed a technical pattern that suggests the rout probably isn’t a blip. The so-called Evening Star candle pattern, which forms over three days and uses the currency’s intraday highs and lows to show a sudden shift in sentiment, is sending early warning signals.
There’s more. Risk reversals, a barometer of market positioning and sentiment, show the premium investors pay to bet against the pound have more than tripled since Dec. 16. And the pound’s one-year implied volatility briefly extended its biggest jump in 13 months.
“The market is coming to the realization that Boris Johnson actually means what he says -- Brexit will happen no matter what,” said Mingze Wu, a foreign-exchange trader at INTL FCStone in Singapore. Worsening developments could push the pound down to as low as $1.20, he said.
Johnson plans to put the divorce part of his Brexit deal to a vote in parliament as soon as Friday. His pledge to leave the European Union with or without a trade deal spurred traders to increase bets of a Bank of England rate cut by end of next year. Money markets price a 80% chance of rate cut by end of 2020 versus 45% on Monday while the yield on 10-year government bonds dropped one basis point to 0.75%.
Data Wednesday showed that U.K. inflation held at its lowest rate in three years in November, providing ammunition for interest-rate doves as the BOE prepares to announce its final decision of the year.
“The UK economy is looking pretty grim and the economic uncertainty is set to last for all of 2020,” said Marshall Gittler, a strategist at ACLS Global. “I wonder how long it’ll be before some members of the Bank of England’s Monetary Policy Committee start talking about the possibility of rate cuts.”
The currency traded at $1.3098 as of 10:58 a.m. in London, and was slightly lower against the euro at 85.0 pence.
©2019 Bloomberg L.P.