Pound sinks as Boris talks tough
With the US holiday crushing volumes and volatility, currency markets have contented themselves to range through the overnight session and into today quietly. The US dollar index was almost unchanged at 93.15, very near the top of its one-month range. The US dollar still has the potential to continue its short squeeze, if Wall Street equity markets return to work with a post-holiday hangover. Asia and Europe though, will likely adopt a wait and see stance until their arrival.
One notable exception is the British pound. The UK Prime Minister’s threat to leave with a Brexit deal on October 15th has unsettled markets which had almost priced out any Brexit risk. That situation is rapidly changing, notably in the options market where volatility has spiked over that time period.
With the (final) Brexit deadline at the end of year, investors may be in for plenty of Brexit jitters. The talks between the UK and the EU resume this week but the mood is one of gloom. On Monday, UK Prime Minister Boris Johnson said that leaving the EU without an agreement in place would be a “good outcome”. The Financial Times reported that the UK government were also preparing to unwind parts of the previously signed exit agreement regarding Northern Ireland with the European Union. Predictably, the Europeans are in a surly mood as they view the British government as being far too rigid in its negotiating stance.
The rapid repricing of risk saw GBP/USD fall by 120 points to 1.3150 overnight. In Asia, GBP/USD has eased slightly and is testing the overnight lows at 1.3140. A failure implies further losses to the 1.3150 regions. GBP/USD has significant long-term support between 1.2980 and 1.3000. A daily close below this level sets in play the potential for a much larger downward correction.
