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A Brexit Sterling punt on the Government losing tonight’s “meaningful vote”

If, like the rest of the population, you’re sick to death with bloody Brexit tonight’s “meaningful vote” can’t come quickly enough. It seems a near certainty that Parliament is going to vote against the Government’s proposed EU withdrawal deal, hurling this tortuous process into even greater chaos. It is anyone’s guess how this is all going to play out, but the situation could create an interesting, short-term trading opportunity with Sterling.

Markets rarely respond well to the sort of political turbulence we’ve experienced recently, as the public debate over Brexit has become increasingly vitriolic. With the Leave and Remain camps as entrenched as they are, it is impossible to see how any form of compromise will ever be reached.

Assuming it does lose tonight’s vote, the Government will then have three days to return to Parliament to reveal its Plan B for Brexit. Given how poorly it has handled the negotiation process, it seems probable the Cabinet has taken its cues from the writers of South Park.

It would be funny if it weren’t so utterly depressing.

Despite all the upheaval, the Pound has had a reasonably robust start to the year. It is up both against the Dollar and the Euro, though in both instances has reached potential resistance at key moving average levels.

Against the Dollar, Sterling is trading just above the 100MA:

 

Against the Euro, the Pound has halted at both the 100MA and 200MA:

Given that the Pound is trading at key moving averages levels, which act as resistance in downtrends, any move to the downside from here could be sharp.

Even so, Sterling is relatively flat today, which is surprising given the almost unprecedented situation Britain faces where a sitting government is going to introduce a vitally important Bill to Parliament, which it knows is going to get defeated. With only three days to come up with an alternative and only ten weeks until the UK is scheduled to leave the EU, there is precious little time to conjure up a solution to the Brexit impasse.

Currency markets often act as reliable oracles for world events, though they are not infallible. Perhaps the market’s sanguine attitude reflects the view that the Government’s looming loss is already priced in. Or perhaps the market is being too rational, unable to bring itself to believe that British politicians would be prepared to risk throwing the country’s economy off a cliff.

We’ll see tonight, but in the meantime, there is a low-risk way to play any potential volatility in the immediate aftermath of tonight’s vote.

The vote is scheduled at 1900GMT. The daily options for Sterling close at 2000GMT. Given that the vote will be televised, confirmation of the Government’s defeat will likely come early in the voting process. If the market decides, on reflection, this is not such a good thing for Britain’s prospects then we could see quite a sell-off in Sterling.

Of course, this is pure guesswork, but one of the advantages of buying daily puts or calls is the closer they are to expiry the cheaper they become. It might well be possible tonight to pick up a daily option on a sharp move in Sterling for 4 points or less.

As of writing, a GBPUSD daily 12,780 put costs 7 points. The market is currently trading at 12,836.

I plan to revisit this trade later on this afternoon.

Author: Ben Turney

Disclosure: The author does not hold a position in the financial instruments mentioned above

 

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