(12 MARCH 2019)DAILY MARKET BRIEF 1:Brexit optimism spikes sterling

Optimism takes over. Sterling is the big winner among G10 currencies as traders appear convinced that a breakthrough in Brexit talks is happening. EUR/GBP is trading at ranges not seen since May 2017 while the cable appreciated by 1.60% since the start of the week. Yet PM May will be facing tough challenges at today’s House of Commons appearance, after facing a first defeat in 15 January 2019 Withdrawal Agreement vote, where UK MPs rejected the deal by 230 votes, the biggest defeat in modern British government history.

Indeed, 17 days before official divorce day and almost one month after first MPs vote, no material changes of Brexit deal have been acknowledged, despite May’s attempt to get further concessions in Strasburg on Monday relating to the British backstop. But instead, three documents which are supposedly “meaningful legal assurances” on EU side and “legally binding” according to May have been provided – this remains far from MPs instruction to replace the backstop by alternative arrangements, an argument the Labour Party will make use of when dismissing the arrangement. UK government top lawyer Attorney General Geoffrey Cox is expected to provide a thorough analysis of the add-on documents at the House of Commons and assess whether the content is enforceable (or not) – an announcement UK MPs will be counting on to take their final decision.

Accordingly, although the agreement appears at sight, we consider the binding dimension of recent documents as essential to allow a major reversal. For now, it seems that the scenario tends more towards a second vote session on Wednesday, where UK MPs will be (1) deciding whether or not it wants to leave the EU without a deal (most likely rejected) and (2) ask for a delay of a few months by way of an extension of article 50.

Short-term, we expect EUR/GBP to bounce back along 0.85555 while a major breakthrough could well push the pair along major support at 0.84852 (31/03/2017 low).