GBP Futures: Brexit Deal, Spain and BoE’s rate war

Theresa May’s meeting in Brussels over the weekend to ratify the Brexit agreement will determine the medium-term prospects of Britain and Sterling.

European Union diplomats were meeting Friday to finalize the draft divorce agreement between Britain and the bloc, amid a warning from Spain that it will oppose the deal if it isn’t guaranteed a say over the future of Gibraltar.

Leaders of EU nations are due to meet Sunday to sign off on the deal, which lays out the terms of Britain’s departure in March and sets up a framework for future relations. But Spain remains unsatisfied.

Spanish Prime Minister Pedro Sanchez tweeted that Britain and Spain “remain far away” on the issue and “if there are no changes, we will veto Brexit.”

If EU leaders rubber-stamp the deal, it needs to be approved by the European and British Parliaments — a tough task for British Prime Minister Theresa May, whose Conservatives lack a majority in the House of Commons.

So we have two issues to be solved. Spain and Approval by the British Parliment.

Brexiteers think the agreement will leave the U.K. tied too closely to EU rules, while pro-Europeans say it will erect new barriers between Britain and the bloc — its neighbour and biggest trading partner. Some say it looks increasingly likely that Parliament will reject the deal. This could open the door to a snap election (or maybe a referendum), although this seems a tall order given that it would require a number of Conservative MPs to back it. But personally, I believe that at the United Kingdom-side , “agreement to approve” before the new year is the biggest target.

Much more important is the BoE’s interest rates policy. The Brexit agreement will eliminate economic uncertainty and messages from BOE suggest that interest rate increases will begin after the agreement. Carney will probably have to tighten policy and a yield spike could be on the way. The pullback in market pricing shows that traders are focused on the growth risk from Brexit but they’re underestimating the potential impact on inflation due to factors such as currency weakness, higher import costs and reduced immigration.

The BOE is unlikely to significantly downgrade its growth outlook in its next set of economic forecasts. I believe that intermediate-maturity U.K. yields will rise relative to those in the U.S., because the BOE doesn’t have the same luxury of putting hikes on hold that the Fed has — especially if the Sterling continues to slide.

“Deal” or “no deal”… Further rate hikes can become a “must” near term.


EURGBP Overview:


The pair is trading in a “squeezing zone” with higher lows and lower highs. However, the UK’s withdrawal from the Union will hit Europe rather than Britain.

The breakout of 0.86500 will trigger the bearish move and a gate towards 0.83000 would be opened. The new direction of the pair will be determined in a few weeks.

GBPUSD Overview:

Like its sister, GBPUSD is also trading in a triangle. It is early to take a midterm position on the Cable, however, a new bullish wave may start at the breakout of 1.29200. A firm closing above 1.30000 would carry the pair towards 1.34500 historical resistance.