Speaking about the pound again: nothing personal, just facts.

Nov 16, 2018

Since the dust has slightly settled after yesterday’s madness, it’s time to take stock. Let's start with what was on the surface. Several ministers of the British Cabinet of Ministers (Dominic Raab, Minister for Brexit, and Minister of Labor Esther McVeigh) have resigned as a sign of disagreement with the current draft of the treaty. As a result, the pound crashed by more than 300 points in a pair with the dollar, and the market covered a shuttlecock of panic. As a result, the main event of yesterday passed by the markets.

And now to voice out loud about analytics do not talk really (it’s not permissible in their environment to talk about positive trends for the pound while it collapses), although this is more important than slamming the doors by certain people. After a five-hour meeting, the UK Cabinet approved a draft agreement on conditions for a country to leave the European Union.

In total, what do we have for now in terms of progress on Brexit:
- “draft” agreement between the EU and the UK - done! (last week only dreamed about it);
- approval of the deal by the Cabinet of the UK - done! (last week they didn't even dream about it).

What has not been done yet:
- approval of the deal by the Parliament (based on the current situation, events should evolve as follows: the November 25 summit with the EU, after which the UK Parliament will take up the treaty, and they must finish before December 20, so the deadlines are more or less clear).

As we see, according to formal criteria, 2/3 of the path is passed. And the current price of a pound is the same as it was when the markets did not even believe in the possibility of a basic agreement with the EU.

Therefore, there has been a severe fundamental divergence - events develop while prices stand still. As in the case of technical divergences, working off is usually the following: the price admits it is wrong and begins to catch up.

Once again, we note that Brexit and the negotiation process associated with it have created a situation that is quite unique in the foreign exchange market. In our opinion, the markets misjudge what is happening, and the pound is very much undervalued. So, there are great opportunities for its purchases. Recall that in the spring, when the majority believed in an agreement between the EU and the UK (but then, unlike the current time, there was not even a hint of a deal), the pound fluctuated around 1.41-1.43. That is, the divergence size is 1000-1500 points. Working it out is inevitable, at least, unless some overt force majeure happens.