Pressure Eases On The Pound As The U.K. PM Faces Brexit Constraints

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Summary

UK Prime Minister Theresa May will not be able to proceed with Brexit plans, hard or not, unchecked by other powers in the UK.

The British pound rallied, especially against the euro, on news that the UK Parliament will likely get a say on Brexit.

The dollar's strong rally has shifted the focus of my trading strategy to the euro.

Scotland may provide an additional Brexit wildcard.

It looks like UK Prime Minister Theresa May will not be able to proceed with Brexit plans, hard or not, unchecked by other powers in the UK. The UK Parliament demanded a say on Brexit proceedings and on October 11th, May essentially acquiesced to those demands. From Bloomberg:

"Prime Minister Theresa May has accepted that Parliament should be allowed to vote on her plan for taking Britain out of the European Union, but asked lawmakers to do it in a way that gives her space to negotiate…

While the concession is unlikely to stop Britain's departure it does give lawmakers in favor of maintaining close ties to the 28-nation trade bloc - probably more than half of the chamber - a tool to pressure a premier with only a slim majority in Parliament."

The response in currency markets was immediate. The British pound experienced a sharp bout of relief. The following 30-minute chart of the euro (NYSEARCA:FXE) versus the British pound (NYSEARCA:FXB) shows how quickly the pound responded. The impact even lasted into the end of the week.

The news on Theresa May's "stand down" came just as the pound looked ready to retest the EUR/GBP high from the pound's flash crash.

The pound's strength came just as it looked like the currency was headed to a retest of the extremes of the flash crash from the previous week. The graph above shows how EUR/GBP briefly surpassed the level marking the initial fade of the pound's recovery against the euro. I now use EUR/GBP as my technical marker instead of GBP/USD because the U.S. dollar has started rallying on U.S. interest rates. EUR/GBP should more closely reflect the pound's European dynamics.

In my last post on my trading strategy for the British pound, I used GBP/USD to show the technical markers formed by trading in the immediate wake of the flash crash. The strengthening U.S. dollar quickly punched through the line in the sand that I drew for realigning myself to the bearish pressure on the pound. The U.S. dollar index (NYSEARCA:UUP) is back to levels last seen in early March, 2016. GBP/USD matched its lowest close in over 31 years. So, if not for EUR/GBP, I would be mainly bearish on the pound right now.

The U.S. dollar index soared to a fresh 7+ month high.

GBP/USD still has that sinking feeling.

EUR/GBP not only shows how the pound rebounded from the brink, but also the round number 0.90 is a clear pivot point. So now I am looking at EUR/GBP above 0.915 as a freshly bearish signal on the pound and below 0.89 as hopeful of at least a relief rally for the pound. Note well that the European Central Bank (ECB) is up to bat this Thursday, October 20th. The ECB could force me to reset these technical bounds.

Scotland may also look to constrain May's ability to break completely free of the EU. Nicola Sturgeon, the leader of the Scottish National Party (SNP) and Scotland's First Minister, vigorously raised the specter of Scottish independence in response to a hard Brexit in a keynote speech to the SNP Conference in Glasgow. A key quote from The Telegraph's coverage:

"Ms Sturgeon told delegates the SNP would work across the political divide to try and 'save the UK as a whole from the fate of a hard Brexit' outside the EU single market.

Ignoring Prof Keating and other constitutional experts, she said her government will propose new powers to keep Scotland in the single market if the UK leaves.

'But if the Tory government rejects these efforts, if it insists on taking Scotland down a path that hurts our economy, costs jobs, lowers our living standards and damages our reputation as an open, welcoming, diverse country, then be in no doubt,' she said.

'Scotland must have the ability to choose a better future. And I will make sure that Scotland gets that chance.'"

Given Scotland just went through an unsuccessful vote for independence and given a legal framework may not exist for a Scottish link to the EU that circumvents Brexit, it is not clear how this will all play out. For now, it is a reminder that May will not likely have a clear runway to take off and break off from the EU. The fallout means more volatility for the British pound ahead with sharp reactions to the latest headlines.

Interest in Brexit continues its resurgence since Theresa May made headlines with plans for triggering Article 50 and the UK's exit from the EU.

Source: Google Trends

Be careful out there!

Disclosure: I am/we are long FXB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: In forex, I am net long the British pound including an active rotation of hedges.