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GBP Stumbles on Hard Brexit Concerns; EUR/USD Boxed In

GBP Stumbles on Hard Brexit Concerns; EUR/USD Boxed In

2017-01-11 12:50:00
Christopher Vecchio, CFA, Senior Strategist
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Talking Points:

- EUR/USD falls back from 1.0600, another failure to get back above the trendline from the March 2015 and December 2015 lows.

- More GBP weakness in the near-term is possible (via GBP/JPY or GBP/USD), but be weary of the UK Supreme Court appeal results.

- See the DailyFX Economic Calendar for today's data and read our weekly outlook on key event risk.

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British Pound weakness is back in vogue, with GBP/USD setting a fresh 2017 low today within days of GBP/JPY and EUR/GBP doing the same: Sterling weakness has been thematic. Primarily, the selling has been reinvigorated by the belief that the UK is stumbling towards a 'hard Brexit' scenario.

Last week, as the UK's ambassador to the EU resigned, he said, "We do not yet know what the government will set as negotiating objectives for the UK's relationship with the EU after exit." UK PM Theresa May said clearly over the weekend, "Often people talk in terms as if somehow we are leaving the EU, but we still want to keep bits of membership of the EU. We are leaving. We are coming out."

Between the two comments, there may be good reason for concern about a messy divorce between the UK and the EU. Yet if markets are basing their recent GBP bearishness on the reinvigorated 'hard Brexit' stance, it may be shortlived. After all, in the coming week or two, we'll get the results of the UK Supreme Court appeal result on whether or not the UK government has the legal authority to trigger article 50 without Parliament's consent.

As we've maintained since the Brexit vote itself, as a non-binding resolution, it would require Parliamentary ratification. If this is the result of the appeal - which is looking more and more likely according to The Guardian, after UK ministers conceded today that "seven of the 11 judges will uphold the high court’s demand that Theresa May secure the consent of MPs and peers before triggering article 50."

That the vast majority of MPs were in favor of 'Remain,' it seems likely that the appeal turning out in favor of Parliamentary inclusion could result in market participants stepping away from the 'hard Brexit' narrative. Thus, while GBP weakness is picking up in the near-term, by no means do we feel that this is the start of the next significant leg lower yet; there is too much event risk ahead that could turn the tide sharply.

See the above video for a technical review of the DXY Index, EUR/USD, GBP/USD, AUD/USD, USD/JPY, GBP/JPY, USD/CAD, Crude Oil, and Gold.

Read more: US Dollar Teetering as US Yields Threaten Pullback

--- Written by Christopher Vecchio, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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