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Allegedly the Brexit negotiations with Brussels continued all night. A deal is said to be found by Wednesday we are told so that it can be signed at a special EU summit before the end of the month. But even Prime Minister Theresa May referred to the remaining issues as being extremely difficult. There were “significant” differences still to be overcome. That illustrates once again: until everything has been agreed, nothing has been agreed. Even if an agreement with Brussels is reached by Wednesday, things are not over yet. Resistance is mounting in Theresa May’s own cabinet against what she might agree on.
The two favorable developments as discussed indicate that we are now moving into the next phase of negotiations which would be somewhat GBP-positive in the near term (we expect 2-4% of upside on the crosses). This might appear as only modest upside but additional upside will likely be capped by multiple factors.
Primarily, even if an EU-UK deal is reached, the path to securing Parliamentary support will likely be tenuous (multiple attempts will be likely be necessary which will likely be a source of headline risk/ greater volatility).
Secondly, even though the news on financial services is positive, the devil will be in the details that will only be known subsequently.
Andfinally, beyond the withdrawal agreement, the new trade agreements still need to be reach which will be a multi- year process leaving the Brexit-related uncertainty overhang intact and thus limiting substantial GBP upside. We thus recommend tactical longs in GBP vs. EUR through options.
The recommended structure is with capped downside given headline risk relating to getting the deal passed in UK parliament and is a (ratio) put spreads given already-rich GBP vols and given expectations of limited upside.
Buy 2m 1x1.5 EUR put/GBP call 0.87-0.8550 RKI 0.84 for 38.9bp (spot ref: 0.8706). Source: JPM, Commerzbank.
Currency Strength Index: FxWirePro's hourly EUR spot index is showing -75 (which is bearish), while GBP is flashing at -32 (which is bearish), while articulating at (12:06 GMT). For more details on the index, please refer below weblink:
