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Looking to the Futures - November 16, 2018

Pound Volatility Spikes as Brexit Drama Intensifies

The British Pound has seen a wild rollercoaster ride this week as conflicting Brexit developments have unfolded. The grueling, endless saga of the U.K. exit from the European Union received a shot in the arm earlier this week with Prime Minister Theresa May’s announcement that a draft agreement had been reached. However, those hopes of real progress, and the stability they offered the Sterling, were quickly dashed Thursday with the resignation of a number of key cabinet members in protest.

The Pound has endured a prolonged selloff from the 145 highs established last spring down to its recent test of the 127 area made late last month. Battling most of the year against a strong U.S. Dollar, coupled with the uncertainty of endless Brexit squabbles, the Pound has slid over 12%. Despite the Bank of England bumping rates up to 0.75% at their August 2 meeting, and offering language supportive of future hikes next year, the battered currency has been tethered to the weight of the Brexit debate. The overwhelming focus for Pound watchers remains the state of Brexit negotiations.

At the heart of the Brexit issue is the border between Northern Ireland and EU member, the Republic of Ireland. The U.K. exiting the EU in March 2019 without a full agreement ironed out could result in a “hard” border for customs and trade along the Irish frontier. Most are in agreement that this would be problematic and needs to be addressed, but cannot agree on how. This sensitive issue has brought about varying proposals that have created divisions in the U.K. domestic Brexit discussions. Creating an “Irish Backstop” with a soft border being maintained beyond the deadline is under heated debate.

The most recent developments this week had PM May holed up for over five hours with her fractured cabinet hammering out the details of a draft agreement that would keep the U.K. in a customs union with the EU while working out a trade treaty. The resolution would then be put to Parliament for approval and then reviewed by the 27 member states of the EU next month. The news was initially received positively as evidence of real progress and fed a rebound in the Pound near the 131 mark. PM May’s announcement, followed by supportive comments from EU counterparts, led to speculation that a deal was within reach despite continued rumblings within her own party.

Those rumblings turned into an avalanche yesterday with the shock resignations of two key cabinet members who refused to sign off on the deal. Brexit Secretary Dominic Raab and Work and Pensions Secretary Esther McVey both announced their resignations Thursday morning in protest to the proposed deal. They were followed by other junior minsters as Brexit hardliner resistance to the plan erupted. The markets quickly reversed course with the Pound dropping over 1.5% back below the 128 level.

May proceeded to defend the plan facing her detractors in open debate in the House of Commons. While emphasizing this is the best deal for the U.K., May faced accusations of betrayal of the original Brexit cause. To make matters worse, the chairman of the European Research Group, Jacob Rees-Mogg, has released a letter calling for a no confidence vote on the Prime Minister. It now appears not only is May’s Brexit plan being challenged, but her ability to lead her party as well. Stay tuned as developments are breaking by the minute.

Technicals:

The steep drop this week has brought the 127 bottoms into play as the next area of support. In the event of a rebound the next resistance will be found at 129 and 130.50.

20-Day SMA   1.2963

50-Day SMA   1.3074

200-Day SMA 1.3496

14-Day RSI      41.00%

The Implied Volatility has spiked with the swings in the underlying market. The at-the-money 1.2800 strike is up to 13.00%.

British Pound futures trade on the CME Globex and can be accessed on your StreetSmartCentral platform.

Contract Specs: December 2018 Natural Gas

Trading Calendar:

Export Sales     7:30 a.m. ET

Industrial Production     9:15 a.m. ET

 

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