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The UK Prime Minister Boris Johnson kept the "Hulk", which he had referred to over the weekend, well-hidden during yesterday’s visit to Brussels. Instead, he seemed rather helpless when he left the lunch with European Commission President Jean-Claude Juncker without commenting and skipped a planned joint press conference with his colleague from Luxemburg due to a small (albeit admittedly very audible) group of Brexit opponents. One thing was clear though, hoped for break-through in the negotiations did not happen. So to me it seems completely incomprehensible why Sterling is nonetheless able to defend at least the majority of Friday’s gains.
In fact, it seems that the EU and the UK have not got any closer to reaching an agreement since Johnson became Prime Minister. Even though Johnson continues to stress that he still sees a chance of a Brexit deal, for this to happen, he wants to see some movement by the EU. The EU, on the other hand, stated that it was available for negotiations “24/7”, but still insists that the British side first had to make a concrete proposal, which is still outstanding.
Given these risks, we continue to maintain the bearish stance on Sterling. In tactical trades, recall that in early August we had rolled over outright shorts into a limited loss cable put spread. The put spread admittedly has only three weeks left to expiry so the primary risk is that the structure expires before risks escalate once again in January.
And remain short sterling via a limited loss tail hedge: Stay short a 2M/1M GBPUSD bear put spread (1.2592/1.1958) as we will continue to monitor the developments in polls and restructure the trade as required in the coming weeks. Risk bias on GBP remains bearish with an inclination to re-enter outright shorts to fade the recent bounce in the coming weeks, the Supreme Court decision, valuations and elections polls depending. Courtesy: JPM