As we forecast here last week EURGBP has corrected lower but the move has been greater than anticipated. Support at 90 has quickly given way to the next support at 88. This looks less like a correction and more like a trend reversal.
As pointed out here in the last few weeks the background to this move was seen first in the change in the Labour Party's approval of an interim agreement following the expiry of the two-year Brexit deadline. The May government may be forced to re-affirm that some sort of interim agreement basically re-affirming the status quo will be required to bridge a gap following the formal end of the two-year Brexit process. This has predictably caused greater dissent within the Tory party with Boris Johnson's piece in the Telegraph this weekend is a prime example. Johnson's op-ed could a view as a prelude to resignation and potentially a challenge to May's leadership. However, if both of the main political parties are in favor of an interim agreement following the two-year Brexit deadline, then the whole issue of the UK's relationship with the EU27 will move into the background & the focus will return to UK's economic fundamentals. Remember, the UK has, so far, only talked about leaving the EU, it still has not happened. So in this period GBP has been cheap, largely because the markets have tended to swallow the governments rhetoric about a hard Brexit.
If Brexit does fade into the background, then the Bank of England will be in a more favorable condition to formulate monetary policy based more on fundamentals. Longer-term indicators using the Vortex indicator have now gone short EUR after being long from levels around 85 back in May of this year. This is not a correction, it's a reversal. The FX markets have remained somewhat complacent about the potential volatility of both GBP volatility vs the Dollar and the EUR. Further sources of volatility apart from Brexit are the durability of the May government and real possibility of another election
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