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Looking to the Futures - January 16, 2019

Pound Rebounds after Brexit Vote

British Prime Minister Theresa May’s proposed exit agreement with the EU was finally put to the “meaningful vote” after months and months of negotiation. The plan was soundly defeated by a vote of 432-202 in Parliament and has maintained that the state of uncertainty surrounding the U.K. exit from the European Union will continue. In a bit of a surprise, the British Pound strengthened following the vote.

On June 23, 2016 the British people voted “yes” on a referendum to leave the European Union by a slight 51.9% margin. After two and a half years of extensive debate, argument, and political deal making, Parliament was presented a plan on the final withdrawal agreement negotiated by Prime Minister May with the EU. Speculation that the plan lacked enough support to pass proved accurate as MPs voted decisively against her deal.

Just last month, after pressure from her own cabinet, May had agreed to postpone the vote on her plan fearing its failure to pass. She has been trying to manage a very difficult fine line since the Article 50 rule of the Lisbon treaty was invoked, starting a two-year clock for the U.K. to negotiate terms of the exit. That clock runs out on March 29 this year and has been ominously hanging over current negotiations. There have been many highs and lows throughout the process with phrases like “hard exit” and “Irish Backstop” becoming commonplace in Brexit discussions.

While trying to honor the people’s directive to leave the EU, she has had to do battle with strong forces from both extremes. On the one hand, she has faced resistance from the “Remainers” who have pushed for a softer exit keeping the U.K. more connected to the EU customs and trade or even hopes for a second referendum. On the other side, she has faced fierce pressure from hard-line Brexiteers clamoring that her compromise plans fall short of meeting the complete break the referendum called for. Her efforts to craft a deal appeasing both sides, as well as the EU, has drawn much criticism and some praise. Her government had made a strong push these past weeks hailing the plan as what’s best for Britain.

Despite opposition from both Labour and those within her own party signaling the looming defeat, May and her supporters did not give up without a fight. Speaking to MPs on Monday, May defended the plan stating, “ It is not perfect, but when history books are written, people will look at the decision of this House and ask, “Did we deliver on the country’s vote to leave the EU, did we safeguard our economy, security or union, or did we let the British people down?”

On Tuesday, Attorney General Geoffrey Cox addressed the MPs urging them to opt for order over chaos. Detailing his support of the plan he stated, “It provides for the orderly and predictable and legally certain winding-down of our obligations and involvement in the legal systems of the EU”.

However, yesterday’s vote total was a record defeat in Parliament. The magnitude of the opposition to her plan has set in motion a number of alternatives. Contingencies for the plan being voted down call for May to have until Monday to present an amended plan to Parliament. Her intentions are just that. Following the defeat May stated she would consider “the views of the House” in crafting a new plan.

May must first survive a no-confidence vote that was put forth by the opposition Labour Party. Following the historic defeat, opposition leader Jeremy Corbyn labeled May ruling a “Zombie Government” with a leader in denial. Analysts believe May will survive the challenge with Tory and Northern Ireland MP support. The confidence vote is set for today at 19:00 GMT (1:00 pm ET).

Beyond surviving the vote and then formulating an amended plan to present next week, there is more uncertainty. May could ask the EU for an extension of the March 29 deadline to give the U.K. more time to work out new details. She may also opt to scrap the current plan its entirety and seek to formulate a new plan with broader approval. Still others contend, the sharp defeat could even spark a call for a second referendum. In addressing the next steps, May stated, “There are two ways of avoiding no deal. The first is to agree a deal. The second to revoke Article 50, that would mean staying in the European Union, failing to respect the result of the referendum, and that is something that this government will not do.”

In the most extreme scenario, nothing gets done with no alternative plan and no extension, and the March 29 deadline arrives with no deal. This “hard exit” is the least attractive outcome and would cause the most disruptions to the market.

The British Pound has been understandably sensitive to any Brexit developments. As the debate in the U.K. intensified toward the end 2018, reflecting a greater chance of a possible no-deal exit, the Pound lost ground. Most analysts agree a “no vote” on May’s plan was already priced into the market.

In somewhat of a surprise reaction, the Pound rallied immediately following yesterday’s vote. Analysts are reading the rebound as a sign that the defeat actually signals a greater chance for more Pound friendly developments moving forward that will avoid a hard exit. At a minimum, the chances for an extension of the March 29 deadline have increased. Furthermore, some now read chances increasing for a new deal being formulated that could be approved. In the extreme, the chances of even a second referendum are back in the discussion. Any of these developments would be considered supportive to the Pound.

 

Technicals:

March 2019 British Pound (BPH19)

 

March British Pound futures have staged a modest rebound from the December lows. The 1.3000 mark will offer the next resistance followed by 1.3150. Support will be found at 1.2660 and the 1.2512 low of last month.

 20-Day SMA     1.2752

 50-Day SMA     1.2837

 200-Day SMA   1.3275

 14-Day RSI        47.59%

 Implied Vol        12.70%

March British Pound futures trade on the CME Globex and can be accessed on your StreetSmartCentral platform under the symbol BPH19.

  

Contract Specs: BPH19

 

Trading Calendar:

Retail Sales     8:30 a.m.  ET

Business Inventories     10:00 a.m.  ET

Housing Market Index     10:00 a.m.  ET

EIA Energy Stocks     10:30 a.m.  ET

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