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Developments surrounding Brexit do not justify a GBP rally seen since mid-August, keep close eye on options market: Commerzbank

Developments surrounding Brexit do not justify a GBP rally that markets have seen since mid-August; instead keeping a close eye on the options market is recommended, according to the latest research report from Commerzbank.

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, the hoped for breakthrough in the negotiations did not happen.

In fact, it seem 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.

Just over 6 weeks ahead of the Brexit deadline and a month ahead of the all decisive EU summit the negotiations remain deadlocked. GBP investors can therefore only ignore the risk of a disorderly (no deal) Brexit at the end of October with an easy conscience if they are certain that Johnson will adhere to the legislation passed by Parliament requiring him to request an extension of the deadline on October 19 if Parliament has not agreed to a Brexit deal or a no deal Brexit, the report added.

But that is exactly what everything hinges on - Johnson’s government has made it clear that it does not intend to do that, but that it instead plans to challenge this piece of legislation in court.

"The decisive question for the GBP exchange rates remains whether or not a no deal Brexit at the end of October is de facto off the agenda. A glance at the EUR-GBP exchange rate might easily mislead interested market observers. Insurance against a possible GBP collapse still requires a considerable premium - options traders do not exclude a major GBP bang. They, too, focus on the time after the EU summit, i.e. the time from mid-October onwards. Neither Boris Johnson nor GBP traders should forget that the Hulk often leaves a wave of destruction in his path," Commerzbank further commented in the report.

By Debarati Bir
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