Brexit Optimism Eclipses Setback In China Trade

The Sterling extended its gains as hopes for a Brexit deal ahead of this week’s EU-UK Summit, which begins tomorrow, keep building up. The unwinding of short GBP hedges has been nothing short of mind-boggling, with the latest headlines spurring further momentum as EU, U.K. negotiators are closing in on draft Brexit deal.

Quick Take

The Pound remains the superstar in the Forex arena as talk filters through the market that that the EU and U.K. negotiators are closing in on draft Brexit deal. We saw in the case of the overoptimism int the US-China trade deal, where plenty of details must still be ironed out, that reversals tend to occur as the dust settles and the market takes a step back to analyze the real merits of the headlines. In the case of the Brexit saga, there is still a high bar to meet in the arithmetic side of the equations. An example of the risk for setbacks is the warning from Germany that no matter the outcome of this week, Brexit will still need to be delayed until next year, which goes against the promises of UK PM. The Brexit narrative has so far assisted in the recovery of risk, even if there are still some cracks that must be addressed in the US-China trade deal, despite the disconnect by US President Trump, which is busy talking about Phase Two of the deal when even Phase One is not yet baked in the cake as China demand the removal of Dec 15 tariffs. All in all, brace yourself for wild swings in the market, especially in the Sterling, where the implied vol is at its highest in 12 months. The Yen, as the favorite vehicle to express risk conditions, will also see volatility crank up significantly, while the rest of the currencies pack should see more limited movements. The Oceanic currencies are trading on the back-foot in the early hours of Asia on Wednesday, as negative Chinese headlines related to the HK conflict and RBNZ comments weight. 

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.

Brexit positivism dominates: The Sterling extended its gains as hopes for a Brexit deal ahead of this week’s EU-UK Summit, which begins tomorrow, keep building up. The unwinding of short GBP hedges has been nothing short of mind-boggling, with the latest headlines spurring further momentum noting that “EU, U.K. negotiators are closing in on draft Brexit deal.”

Legal text demanded by Barnier: The EU’s chief Brexit negotiator Barnier said a deal is still possible this week but before that becomes a reality, he has requested a legal text of any agreement by midnight UK time in order to decide if a deal is up for consideration during the EU summit. Should the deal be accepted and received the blessing from the EU members, which remains at his point two major assumptions, the ball will then move to the UK parliament courtyard, where an extraordinary assembly is scheduled on Saturday to achieve parliamentary approval. If by October 19th we have no deal, the Benn Act legally forces the UK government to seek a Brexit extension.

Watch speech by UK PM in Parliament: UK PM Boris Johnson is set to address backbenchers at 7.30 pm London time on Wednesday, according to the Daily Telegraph reporter Christopher Hope, which has only fueled the optimism that Johnson is setting the stage to gain the necessary support for a deal. Whether or not Johnson receives support from the DUP is the real question here. Stay glued to the newsflows.

Germany warns extension will still be required: Throwing cold water into the prospects of an immediate departure of the EU, the UK Times notes that Germany has warned that no matter the outcome of this week, Brexit will still need to be delayed until next year. The prime minister has been told that ironing out the details of his complicated Northern Ireland plan would take “some two more months”, which would force UK PM Johnson to request an extension to Article 50 on the basis of an in-principle deal.

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The Daily Edge is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth ...

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