“You can’t handle the truth!” A great film and, at least as far as its most famous line, somewhat representative of the Pound Sterling’s fortune. GBP has staged an immense rally as position adjustment forces those betting on the Pound’s decline to re-evaluate and trim their positions. Billions of Pounds worth of contracts were held that would pay off in the event of a fall in the Great British Pound. Those financing their positions on loans and funds responsible to the wrath of shareholders were forced to trim those positions. When you’re on the losing side of a trade the only thing you can do to get out, to annul the position, is to buy back the instrument to the degree that you are short of it. So the Pound can be seen as our Newtonian third law of motion: for every action there is an equal and opposite reaction.
We promised you volatility, and you’ve got it! The Pound ebbs and flows upon the whim of global headlines often contradictory in nature and certainly opaque in their formation. Yesterday the yoyo-ing Pound Sterling took a dive, losing a cent’s worth of ground to the US Dollar, proceeded to claim it back perfectly, before losing 80% of it all over again. The concern heading into this morning’s trade is that whilst some EU leaders, those that populate the decision making body called the European Council, approach Brexit with seemingly sanguine eyes, some more peripheral members might not share the same opinion.
I would contend that any one of you reading this that holds a vested interest in the Pound’s fortune could offer me a smattering of quotations from EU leaders including but not limited to Boris Johnson, Angela Merkel, Emmanuel Macron, Leo Varadkar, Donald Tusk and Jean-Claude Juncker. Only four of these hold a seat at the European Council as a head of state leaving another 24 unaccounted for. These people could be the ones that make all the difference to what Brexit, if any, we end up with. After the close of the European session and in New York trading hours, 0.6% of the value of the Pound was wiped away upon news that the Finnish Prime Minister, Antti Rinne, thought “more time” is needed in negotiations. To put that into perspective, that change in value over one year in terms of UK exports to the European Union is some 1.64 billion Pounds worth of difference.
On Thursday these leaders will sit at perhaps the UK’s most important summit in its 46-year membership. Yet another of these contradictory headlines purports that the framework legal documents on customs won’t be ready for debate and negotiation. A whole myriad of possibilities are open from this meeting. A fair four-part analysis would suggest your likely outcomes are rejection; extension; summit-take-two; or deal. The fortunes for Sterling are likely to be increasingly positive as you move along that spectrum. Given the lack of preparation of legal documents for agreement, the EU Council could agree to yet another summit ahead of the 31st deadline. Far more likely and pragmatic in order to afford parliament the proper time for scrutiny of the agreement would be an extension. I maintain a deal is possible, however, expect the price of a pound to whipsaw during this meeting from 17th October. At SGM-FX we’ve got every tool you might need to take advantage of this exciting market period.
Discussion and Analysis by Charles Porter