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Brexit likely to dominate as May takes to the airwaves

david cameron downing street politicians politics

david cameron downing street politicians politics

European markets underwent another disappointing session yesterday, with Irish stocks suffering the biggest falls over concern that a no-deal Brexit would fall most heavily on the Irish economy. The rest of Europe also struggled for gains on the back of another disappointing month for European auto sales as well as ongoing political uncertainty with respect to the Italian budget.

US markets, on the other hand had a more positive session buoyed by reports that the US and China were once again engaging on the question of trade, and this positive finish should translate into a strong European open this morning, with market attention likely to remain on the latest developments in the Brexit soap opera, and whether we get any more high profile resignations from the cabinet, with the actions of environment secretary and key Brexiter Michael Gove, of particular interest. Thus far he has held back from signalling what actions he might take, but if he were to follow the other resignations it would show that the prime minister is more isolated than ever.  

The pound had a truly rotten day yesterday, posting its worst day since the October 2016 flash crash, sliding sharply in the wake of a number of key cabinet resignations, as well as the prospect that Prime Minister May might well be subject to a leadership challenge in the next few days. It didn’t take long for the inevitable cabinet splits that many people had predicted on Wednesday to manifest themselves, the most notable of which was the Brexit secretary himself, Dominic Raab.

While speculation swirled about the prospect of a “no confidence” vote and leadership challenge, Theresa May came out swinging yesterday evening, living up to her reputation as a “bloody difficult woman” by pledging to carry on and deliver on a deal which she said delivers on the referendum vote.

With that in mind she is set to go on radio this morning and take questions from the public in order to put her case directly to an audience outside the Westminster bubble. The problem she has however is one of arithmetic as well as trying the political equivalent of fitting a square peg into a round hole.

The reality is that this deal appears to be hated by all sides but it is also the choice facing MPs in the next few weeks as they mull the prospect of rejecting an unsatisfactory deal, or going with a no-deal Brexit, or no Brexit at all, if Theresa May is to be believed. For now, there doesn’t appear to be any other option.

Against the current backdrop and the timing of a parliamentary vote, which won’t happen until next month at the earliest, political uncertainty is likely to continue given that there is talk of a challenge to the leadership of Prime Minister May in the form of a “no confidence” vote.

If the 48 letter threshold is reached for a vote to be called then the matter will then probably go to a vote in the next few days, which would require Mrs May’s opponents to get 159 MPs to vote against her in order to force her to step down. Even if the prime minister were to win the vote it would need to be by a very wide margin for her not to be politically damaged in some way.

In any case any new leader will face the very same problems that the current incumbent is now facing, which means that for all the sound and fury that is currently buffeting currency markets, the ultimate calculus remains the same in that there is no majority in the House of Commons for a “no deal” Brexit, which means that MPs will try and coalesce around some form of alternative, assuming a general election can be avoided.

It was fears around a possible election, a no-deal Brexit and a Corbyn government that saw UK banks and housebuilders fall sharply yesterday, though the rise in UK gilt prices suggests that the bond markets think this an unlikely scenario for now. 

EUR/USD – appears to have found a base around the 1.1210 area, but needs to consolidate a move back through the 1.1350 area too argue for a bigger move towards 1.1500. The 1.1180 area remains a key support, with a break targeting a move towards 1.1000.

GBP/USD – continues to be buffeted by the conflicting winds of Brexit sentiment rebounding to 1.3050 earlier this week, however it has quickly reversed those early week gains, falling sharply below the 1.2820 area yesterday and opening up the possibility of a move towards the October lows at 1.2660.

EUR/GBP – hit a new six-month low earlier this week at 0.8655, but has rallied sharply back through the 200-day MA at 0.8840, and could spill over back to the October highs at 0.8940. This along with the August highs at 0.9100 means we’re still in the broad range.

USD/JPY – continues to find the air a little thin above the 114.00 area with larger resistance behind that at the October peaks at 114.60. Pullbacks are likely to find support at the 112.80 area.

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