Morning Commentary: The More Things Change, The More They Stay The Same

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

The More Things Change, The More They Stay The Same Share this story: Andrew Kositkun Foreign Exchange Head Trader

Volatility in the British pound was sharply elevated over the past 24 hours as it spiked up to a level that is ~2.5 times higher than the second most volatile G10 currency.   This sharp move in volatility was driven by news that PM May was able to win concessions on the terms of the U.K.'s divorce from the EU.  This new "joint legally binding instrument" addressed concerns over how to avoid a hard border in Ireland (EU) and Northern Ireland (UK) as well as concerns that the U.K. could be stuck in a customs union should the two sides be unable to strike a comprehensive deal.    The GBP spiked higher by ~2.1% off the back of this news as hopes were raised that a Withdrawal Agreement could pass Parliament.  However, this optimism quickly faded and increased GBP selling quickly brought the GBP back down to where it started roughly 24 hours before.    The catalyst for GBP selling came from a familiar source—concerns that PM May's deal wouldn't be acceptable to Parliament.  The GBP started losing steam as reports emerged from ERG and DUP officials indicating that those two parties would struggle to support the new deal as it falls short of requirements.  The selling then picked up steam as U.K. Attorney General Cox delivered a pessimistic assessment of the new deal.  The Attorney General acknowledged that while the revised terms reduced the risk that the U.K. could involuntarily and indefinitely remain in a customs union, there still remains risk that the U.K. will not have lawful means to unilaterally exit the customs union backstop.  In truth, this interpretation shouldn't have surprised the markets as the EU has been clear that the legal status of the backstop remains unchanged.  Nevertheless, the legal interpretation caught the market's attention and, for all intents and purposes, dealt a severe blow to PM May's chances of passing her Withdrawal Agreement.    PM May is scheduled to hold a second meaningful vote today. With another defeat expected, the margin of defeat will be in focus.  Should the Withdrawal Agreement fail to pass by another wide margin (more than 150 votes), expect uncertainty to remain elevated and scope for further GBP weakness as long GBP has been the consensus trade over the past weeks.  HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: U.S. CPI came in a bit softer than expected with month over month core CPI coming in at 0.1%, missing estimates of a 0.2% rise as autos and prescription drug prices fell.  Ultimately, this report reinforces the Fed's narrative that inflation remains tame, allowing the central bank to remain on the sidelines.  President Trump submitted his budget yesterday.  Democrats, and some Republicans, have expressed concerns over its elements, setting the stage for further discord.  While the initial budget is usually an opening gambit, Washington D.C. partisanship remains high, as exhibited by the longest government shutdown in history, making compromise difficult.  A survey of business conditions in Australia fell from 7 to 4 which suggests that Australian GDP should continue to underperform and increase uncertainty around the Reserve Bank of Australia's forecast for lower unemployment.

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