FX Currents: Hidden and Not So HIdden

There are two potentials FX shaking events on the horizon:

• One in plain sight but the pundits are miscalculating the outcome: the UK Parliamentary decision on Brexit
• The other lurking under the radar: the Italian Government Budget; one the EU will not accept.

Both have the potential of causing havoc in the FX markets.

Both the EURUSD and GBPUSD reacted similarly to the news that the UK and EU had agreed to a joint declaration. The agreement now has first to pass the EU parliament (probably Nov 25), then the UK’s.

Note the initial upward move, followed by a pullback.  Any news perceived as favourable or otherwise is causing strong waves in the FX markets.

I expected the declaration. It would have been politically unpalatable to have no agreement for the UK Parliament to approve.  From that comment, you can surmise I don’t expect the EU Parliament to do anything but pass the agreement.

The UK? That’s a whole different question.

The referendum on Brexit was supposed to fail (Britain to remain) because the cost of leaving was too much. The market failed to appreciate the underlying anger caused by the EU running British affairs. The present agreement does little to assuage that anger. But the same argument is trotted out:

“It’s the best deal. It will be far worse for the UK if Parliament does not pass the deal”.

Under the circumstance, I can’t see Labour coming to the rescue of May’s minority Government.  That leaves the DUP (Democratic Unionist Party).

The DUP has made it clear it considers unacceptable the way the agreement deals with the Irish border question.  Except for some waffle about future dealings between the UK and EU, the sealed terms for the border are said not to have not changed.

So, here again, the reason why the DUP will support the passing in Parliament? It comes down to ‘a bad deal is better than no deal’. 

I can’t see it happening.

So, if the deal does not go through what next? NO ONE KNOWS.

The uncertainty so generated will be the initial reason why we’ll see the EURUSD and GBPUSD move lower.

How will I be trading my scenario? Once we know when the agreement will come before the UK Parliament, I’ll be looking to position myself for a GBPUSD, EURUSD move South.

Next week, I’ll consider the even more threatening event to the EUR: the Italian question.