- Brexit is out of the headlines for now thanks to the Easter holiday. All of that will change next week when UK parliament reconvenes on April 23.
- Cross-party talks between Labour and Tory leadership appear doomed to fail; a general election may be around the corner.
- Recent positioning changes draw into question the British Pound’s ability to sustain anything more than a short-term relief rally.
Traders have been able to ignore the Brexit mess for the past few days, particularly as UK parliament is out of session until April 23 due to the Easter holiday. But as the end of the week comes into focus – tomorrow is effectively the last day for Europe, given the closure for Good Friday – traders should start thinking about what will come next in the Brexit process once markets resume full steam ahead after Easter Monday.
Next Steps in the Brexit Timeline: April
By the end of April: Now that the European council has agreed to extend the Brexit deadline to October 31, 2019 with a check-in at the end of June, UK Prime Minister Theresa May and Labour party leader Jeremy Corbyn have continued cross-party talks. The goal is to find enough common ground to whip the votes for the EU-UK Withdrawal Agreement to pass through UK parliament. Early indications from both Labour and Tory party officials suggest that the talks will result in very little.
If ‘no’ cross-party deal (most likely outcome): Tory party leader May could step down as prime minister. If so, this would trigger a new Tory party leadership election in May. If UK PM May does not resign, the Labour party would likely take other steps in May.
If ‘yes’ cross-party deal: A cross-party deal could take two different forms. On one hand, it could mean that there is enough cross-party support for a ‘soft Brexit,’ something that hasn’t come together in any of the indicative votes put forth in parliament yet. On the other hand, a cross-party deal could be an agreement for a second referendum on the Brexit vote altogether.
Next Steps in the Brexit Timeline: May
If Theresa May Resigns: If May has resigned as PM, the Tory party would hold new leadership elections, very likely seeing a ‘hard Brexiteer’ come to power. In turn, moderate Tories could leave the party, leaving the Tories without enough support for a governing majority. Without a governing majority, a general election would need to be called.
If Theresa May Does Not Resign: If UK PM May does not resign, it is likely that the Labour party brings forward a no confidence vote forward. If the vote succeeds, then a general election would need to be called. If the vote fails, then odds are extremely high that no progress will be made by the end of June check-in with the EU.
By May 22: If there are enough votes to get the EU-UK Withdrawal Agreement passed through UK parliament, ensuring a ‘soft Brexit,’ UK parliament will need to ratify the EU-UK Withdrawal Agreement by May 22 to avoid European elections. If the UK parliament fails to ratify the EU-UK Withdrawal Agreement, then the UK will have to partake in European parliamentary elections.
British Pound Positioning Paints Mixed Picture
The lack of clarity about what could happen over the next few weeks has provided little relief for traders; that the British Pound hasn’t rallied during a time when volatility readings have been depressed is a cause for concern. Recent changes in positioning across the GBP-crosses suggests that if prices do rally, the nature of the rally will be a short-term relief rally; more evidence is required to determine whether or not GBP-crosses are bottoming out in tandem.
IG Client Sentiment Index: GBPUSD Price Forecast (April 18, 2019) (Chart 1)
GBPUSD: Retail trader data shows 75.3% of traders are net-long with the ratio of traders long to short at 3.06 to 1. In fact, traders have remained net-long since Mar 26 when GBPUSD traded near 1.3205; price has moved 1.5% lower since then. The percentage of traders net-long is now its highest since April 8 when GBPUSD traded near 1.30594. The number of traders net-long is 8.8% higher than yesterday and 17.9% higher from last week, while the number of traders net-short is 12.9% lower than yesterday and 23.1% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBPUSD prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBPUSD-bearish contrarian trading bias.
IG Client Sentiment Index: GBPJPY Price Forecast (April 18, 2019) (Chart 2)
GBPJPY: Retail trader data shows 54.1% of traders are net-long with the ratio of traders long to short at 1.18 to 1. The percentage of traders net-long is now its highest since April 10 when GBPJPY traded near 145.204. The number of traders net-long is 11.1% higher than yesterday and 11.9% higher from last week, while the number of traders net-short is 23.4% lower than yesterday and 6.9% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBPJPY prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBPJPY-bearish contrarian trading bias.
IG Client Sentiment Index: EURGBP Price Forecast (April 18, 2019) (Chart 3)
EURGBP: Retail trader data shows 42.3% of traders are net-long with the ratio of traders short to long at 1.36 to 1. In fact, traders have remained net-short since April 5 when EURGBP traded near 0.85835; price has moved 0.7% higher since then. The number of traders net-long is 10.0% higher than yesterday and 8.4% lower from last week, while the number of traders net-short is 13.1% lower than yesterday and 11.9% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURGBP prices may continue to rise. Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURGBP trading bias.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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