Theresa May has a difficult task on her hands and possibly, this is the last chance for her. EU has already agreed to her Brexit text, but the major obstacle is still there
It was another long night for the United Kingdom’s prime minister, Theresa May. Divorces are never an easy task. U.K. leaving the European Union is the type of divorce that is going to have an impact on millions of lives. After the 2016 Brexit referendum, the U.K. decided to leave the European Union and since then Theresa May has been working hard to strike a deal with the E.U. Perhaps, this has been the most arduous task in her career and one needs to applaud the fact that she is determined to deliver on it.
On Monday night, she stayed up all night to reach a deal with the E.U. This month is crucial for striking a deal. She only has two days if she wants this all wrapped and sealed off by a special E.U. summit this month. She thinks that the proposed “backstop” would resolve the Irish border issue. However, this has failed to impress her party members. Not many are on board. This is because, pro-Brexit Tories (Theresa May’s party) think that this is nothing but a trap, which the U.K will not be able to escape from without permission from the E.U.
In recent developments, U.K and EU have agreed on Brexit text. Theresa May would have to convenience the Cabinet today that this is the best deal that the UK can get, not that this is the best deal she can get. The fact is that these two are very different things, if the idea is; this is the best deal she can get, then the slogans of “a dead woman walking” would come back to hunt her.
This is perhaps the prime minister’s last chance. If she doesn’t make it, this could create another major setback for the U.K. and for her career.
What Is The Trade?
Given the intensity and time sensitivity of the current turmoil, one should be ready to take a position on the back of this event. The currency space is particularly interesting. Sterling has been under major pressure since the 2016 Brexit referendum, it broke the critical level of 1.30 on the against the dollar November 11th, 2018 but it is back above the 1.30 mark again (at least for now). Clearly, panic is pushing the price lower and it is important to keep in mind that when blood is in the street. It is the best time to look for an opportunity in terms of investment.
Given the circumstances, a major move is on the horizon. It is important to be on the right side of the trade or at least be prepared, to accept the losses quick enough to change the direction of the trade. Looking at the pound-dollar quarterly percent change chart below, there have been only a few instances when the prices moved significantly.
The CFTC recent data released on November 11th, 2018 confirms that speculators have reduced their net short positions since September. This indicates that the hedge funds are holding a bullish view on the currency. That would only be because they expect the U.K to strike a deal with the E.U. If a deal is achieved, chances are that the price of the sterling-dollar pair could target the 1.40 level in the longer term. That would be nearly +7% move from its current price which isn’t something unheard of if you look at the above chart.
However, if there is no deal, then sterling-dollar is not only likely to break below 1.25, but the move could extend the sell-off toward the 1.23 mark, a level not seen since April 2017.
Summary
We think the next 24-48 hours are immensely important for the sterling-dollar pair and a huge move is strongly on the cards. One should be ready for this event because history could repeat itself. In other words, we are expecting at least 3-5% upward or downward move for the pair.
