GBP/USD: Sterling heads toward Brexit vortex as clock ticks (Reuters)

Article by efxData:

LONDON, Nov 14 (Reuters) - With just five months to go until Britain leaves the EU, so much about Brexit remains to be determined, but that could begin to change soon -- with potentially dramatic consequences for the value of sterling.

The possible results, and the variations among them, create the conditions for a wild ride in the foreign exchange market that could conceivably send sterling as high as 1.50 or to depths as low as 1.00.

The first issue is a negotiated deal with the EU, but that hurdle could be crossed relatively soon. Thrashing out an agreement with Brussels is one thing, though, getting Britain's divided political establishment to back it is quite another, which may temper initial enthusiasm for sterling.

If things really turn tumultuous, talk of taking the issue before UK voters for a second referendum will increase, possibly bringing the European Court of Justice into play and making for a bumpy ride for the pound.

DEAL OR NO DEAL

The first fork in the road for sterling will be determined by British and EU negotiators. GBP/USD could drop to or through its August 2018 low of 1.2662 if officials fail to reach a breakthrough this week in talks to fix a Brexit framework and extend south to 1.20-1.15 if the impasse persists through the December 13-14 EU summit in Brussels.

The 1.20 level is near the 2017 low, struck in January that year, while 1.15 is close to the post-Brexit referendum trough hit when the pound flash crashed in October 2016.

In contrast, a Brexit breakthrough this week could tee up a special Brexit summit for November 24-25 and prompt short covering in sterling as well as buying of the pound driven by FOMO - fear of missing out on gains in the pound if a deal is agreed at the summit.

This combination could inflate cable to 1.32, if not 1.35.
Brexit deal hopes helped inflate GBP/USD to a three-week peak a quarter-cent shy of 1.32 last week, before a negative shift in sentiment on a deal hurt the pound. It most recently threatened 1.35 in June.

HORSE TRADING

If there is a breakthrough leading to a Brexit deal, UK MPs in the House of Commons will be next to decide the pound's fortunes nL8N1XN30S.

They could send GBP/USD rallying up to 1.40 for the first time since April if they come together in a majority to approve a deal. A Commons vote would be expected before Christmas if Conservative PM Theresa May's government and the EU reach an agreement this month, with the British parliament in recess from December 21 until January 7.

In contrast, fears of a disorderly Brexit would increase if MPs reject a deal, which could send cable plunging towards 1.15 in a first-wave reaction.

One thing that could save the pound in that case would be momentum for a second referendum as a possible solution to the Brexit conundrum.

Labour's Brexit spokesman Keir Starmer on Monday said his party would call for a general election if MPs reject a Brexit deal and that if an election doesn't happen "then all options must remain on the table and that includes the option of a public vote".

GBP/USD could soar towards 1.50 if Britain held another referendum on leaving the EU, on the hope that a majority of Britons might vote to reverse Brexit.
Cable scaled its 2016 peak of 1.5022 shortly after referendum polling stations closed at 10 p.m.
BST on June 23, 2016 on the expectation -- which proved false -- that Britain had voted to remain in the EU.
The pound subsequently plunged as the referendum results came in.

SEE YOU IN COURT

But, divining sterling reaction to all things Brexit becomes more complicated still.
The European Court of Justice will hear a case on November 27 reviewing whether Britain can unilaterally withdraw its decision to leave the EU.
It is not clear when the court might deliver a final ruling on the case.

If the court rules that Britain could unilaterally revoke Article 50 before March 29, it would open the door to a second referendum.
That door would be a lot narrower if it rules that Britain would need the agreement of the other 27 EU nations if it wants to revoke Article 50.

Ladbrokes currently quotes 9/4 odds for another UK EU referendum before end 2019, with Paddy Power quoting shorter odds of 2/1. Three former British prime ministers -- Conservative John Major as well as Labour's Tony Blair and Gordon Brown -- have said a referendum is the way to resolve the Brexit crisis.

Jo Johnson, younger brother of Boris, also called for another referendum when he resigned from May's government last week.

Ultimately, if Britain's exit from the EU is extremely disorderly, GBP/USD might drop to threaten 1.00 for the first time since 1985.
Its high-water mark since then was 2.1162, which it hit 11 years ago this month.
And, even in the case of a supposedly orderly separation, Britain -- and the foreign exchange market -- could be left assessing and reevaluating the effects of Brexit until the end of this decade and beyond.

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