The following article was written by FXTM Senior Staff Writer Nikola Grozdanovic.
Nikola Grozdanovic, FXTM
The 14th of November, 2018, was a landmark day for Brexit and the markets. The UK’s Prime Minister Theresa May held an emergency cabinet meeting to seek approval for her long-anticipated draft Brexit deal. Months of negotiations, protests and persistent questions surrounding the Irish border culminated in a five-hour meeting in which a split cabinet approved the draft deal.
On the 15th of November, FXTM reported that trader sentiment was resoundingly negative in response. A day after the cabinet meeting, 76 per cent of FXTM clients were going short on GBP/USD. FXTM takes a look at the developments which led to this lack of investor confidence in the Pound, and the markets’ reaction as the crucial Brexit events unfolded.
Following the announcement of May’s emergency Brexit meeting, Sterling soared against the US Dollar and the Euro. Trader sentiment was positive, with investors hopeful that a deal had finally been secured. Sterling rose 1.4 per cent to $1.3036 against the Dollar and broke its seven-month high against the Euro at €1.1542. Sterling continued on its positive trajectory after the results of the meeting were revealed. As the news that May had won the support of her cabinet hit the headlines, GBP/USD rallied more by 170 pips.
However, as the day progressed momentum dropped. Prominent politicians, including Jacob Rees-Mogg, chair of the European Research Group, and Nicola Sturgeon, Scotland’s first minister, spoke out about their strong opposition to the draft deal. More dissenting voices emerged as the trading day came to a close.
In response, market participants no longer seemed as optimistic about the deal’s success. Against the Dollar, the Pound dropped from the highs it had experienced after May’s cabinet passed the draft. Uncertainty crept in, leaving the Pound at around 1.30 at the end of the trading session.
Thursday saw the political repercussions of the draft deal fully manifest. By lunchtime, six MPs had resigned, including Brexit Secretary Dominic Raab and Work and Pensions Secretary Esther McVey. Dominic Raab is the second Brexit secretary to resign in six months, after his predecessor David Davis resigned over the Chequers plan in July. Raab’s exit is expected to seriously impact other MPs’ confidence in the plan and damage the chances of the deal passing through parliament.
In reaction, the Pound plummeted – exhibiting the largest drop in 17 months. Immediately following Dominic Raab’s resignation, Sterling fell 1.8 per cent and UK government bonds rallied with the yield on 10-year bonds falling to 1.4 per cent. The stock markets trembled and companies with affiliations to the UK found their shares falling dramatically. Barclays Plc fell 6.6 per cent, Royal Bank of Scotland Group Plc 6.8 per cent and Lloyds Banking Group Plc 4.9 per cent. Royal Mail saw its profits halved. Traders’ appetite for risk and UK exposure had noticeably declined.
As Thursday came to a close, the markets witnessed further uncertainty as members of the Conservative party questioned Theresa May’s leadership. Meanwhile, the emergency EU summit on the 25th of November draws closer. Here, May will face one of the final Brexit hurdles: achieving the EU leaders’ approval and signing the deal. With Tory MPs reviving the discussion of a possible second referendum, traders can expect Sterling to be subject to more turbulent times ahead.
On the 18th of November, during an exclusive interview with Sky News, May remained defiant as opposition to her leadership continues to mount. She will continue to make the case that this is the best Brexit deal possible (she’s due to attend a pro-EU conference and appeal to British businesses on the 19th of November), meanwhile anxiously waiting to hear about the letters of no confidence sent by Conservative MPs. If the number of letters reach 48, a vote on her leadership will be triggered and May’s future as PM will be under serious threat. As each new development seems likely to intensify opposition at home, investors will be paying close attention to the unfolding events this week, with confidence in the Pound continuing to dwindle in the short term. As of writing, GBP/USD is trading just above 1.2800 and investors may find that less risky assets remain more appealing over the next few months.
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