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Today, FX traders are now intensely focused on UK. Like a car-crash its hard to take your eyes off the chaos. PM Johnsons masterful strategy to shorten parliament’s chance to define Brexit, was pure political theatrics. Opposition countered with legislation seeking to “stop the UK leaving the EU without a deal”. The legislation, to be published on today, would prevent Prime Minister Johnson from allowing the UK to leave the EU without an agreement (i.e No Deal Brexit) on 31st October. Interestingly, Tory minister Michael Gove has failed to stated whether the government would follow by legislation geared to halt the UK leaving the EU without a deal.
Yet clever Boris countered he would call for a snap general election on 14th October if MPs succeed in seizing control of Commons agenda. GBPUSD bear trend persisted breaking 1.200 psychological support. Part of the pairs weakness can be attributed to USD broad strengthen, but GBP weakness outpaced G10 peers. Threats from Tory MP who voted against the whip will face deselections increased the likelihood the legislation fails. However, there is a risk of wide insubordination, based on the x-PM Teresa May experience. The timelines for no no-deal legislation getting through both Houses are extremely tight, rising the uncertainty level.
Despite the noise, the probability of a no-deal exit remains the highest outcome in our view. In this scenario, we would expect the BoE to jump into action to stabilize the economy with significant interest rate cuts. Yields on 10yr gilts fell to record low at 0.382%, on news of a potential early election. This would further pressure UK yield curve and drive GBP lower. Worry about overcrowding in GBP is unfounded as short positioning in the past has been greater. No-Deal Brexit is mostly but not fully priced into. The further downside in GBP against CHF and JPY looks likely given the political uncertainty market is facing this critical week.