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UK Supreme Court Decision: Anti-Climactic?

Summary:

 

Sterling retreats on court ruling but key supports hold and it recoups initial loss.

The US dollar is recovering with the help of firming US yields.

Investors are still anxious for details of new US government’s tax, deregulation, and infrastructure investment plans.

The UK Supreme Court will hand down its ruling tomorrow on the government’s appeal of a High Court decision that recognized the right of Parliament to vote on triggering Article 50. Initially, this was seen a big deal. Parliament is not so keen on the hard Brexit (clean break), so the potential of a greater role for it suggested a softer exit, which was understood to be sterling supportive.

However, time marches on, and Prime Minister May appears to have effectively stolen the thunder of the decision and framed the issue. Arguably, she reduced the market significance of the Supreme Court ruling by recognizing Parliaments right to vote on the final agreement. She framed the issue by indicating that she wants a new trade deal with the EU.

Parliament may hem and haw, but the risk of it not voting to trigger Article 50 seems slim to none. There may be some efforts to frustrate the vote, like a campaign to oppose to abstain, but approve the triggering of Article they will. The issue is really a domestic constitutional issue about the role of Parliament. It is much less about substance.

The vote on the final agreement may also be less than meets the eye. If an agreement is struck and Parliament votes against it, there is unlikely to be sufficient time to negotiate a new agreement. Assuming the two-year negotiating period is up, the UK may be forced out of the EU without an agreement. The chaos that could ensue would be laid at the feet of Parliament, not 10 Downing Street.

Prime Minister May will finish the week by going to Washington and meeting US President Trump. Many observers find connections between Brexit and Trump’s election. Many of the analogies seem like a stretch, but unlike Obama, Trump supported the UK decision and has been antagonistic to the EU (as a German mechanism to secure trade advantage). While Obama said a free-trade deal with the UK would not be an important priority, Trump was more sympathetic.

May might be hoping that Trump confirms this intent, but the UK cannot negotiate a free-trade agreement as long as it is part of the EU, which it will be for the next two years. Moreover, a free-trade agreement will take some time to negotiate the bilateral US-Canada agreement in the second half of the 1980s illustrated (which took three years from the beginning of negotiations to implementation.

 

A week ago, sterling gapped lower anticipation of May’s speech on Brexit. It briefly dipped below $1.20 for the first since the October flash crash. It rallied strongly as May’s speech on January 17 failed to go beyond the extensive advanced excerpts. Sterling consolidated those gains in the second half of last week. Today it has pushed higher to reach its best level since December 19.

The technical outlook for sterling looks constructive. A close above $1.2475 is needed to confirm. Last week’s gap looks like an exhaustion gap. The subsequent price action is bullish. There appear to be two dominant patterns and both of which suggest potential toward $1.28.

First, a potential head and shoulder pattern may have been carved. The left shoulder was in late December and early January near $1.22. The head was formed last Monday and Tuesday. The right shoulder was the lows from the second half of last week around $1.2255. The neckline is $1.2430.

The second pattern is a potential flag pattern. The pole was last the January 17 rally (sell the rumor, but the fact) on May’s speech. The flag itself was the last three sessions. Flag fly at half-staff. The $1.28 area that both patterns project toward corresponds to a 61.8% retracement of sterling’s decline from the early September high near $1.3450.

The cross against the euro may absorb some of the pressure. A break of GBP 0.8580 would suggest a move to GBP 0.8515 initially, but probably back toward GBP0.8435, if note the early December low near GBP 0.8300.

GBP/USD - British Pound US Dollar, January 24

(see more posts on GBP/USD, )
GBP/USD - British Pound US Dollar, January 24

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Marc Chandler

He is Global Head of Currency Strategy of Brown Brothers Harriman (BBH). He has been covering the global capital markets in one fashion or another for 25 years, working at economic consulting firms and global investment banks. He regularly appears on CNBC and has spoken for the Foreign Policy Association. In addition to being quoted in the financial press daily, Chandler has been published in the Financial Times, Foreign Affairs, and the Washington Post.
BBH provides specialist services and innovative solutions to many Swiss asset managers that include a global custody network of close to 100 markets, accounting, administration, securities lending, foreign exchange, cash management and brokerage services. Feel free to contact the Zurich office of BBH

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