Sterling Forecast: Volatility Likely to Soar on Brexit No-Confidence Vote

The British Pound (GBP) is expected to become more volatile, with larger price-swings, as a potential Brexit no-confidence vote nears. The UK Parliament returns from its summer recess on Tuesday September 3rd and MPs are expected to immediately debate and vote on a motion of no-confidence in UK Prime Minister Boris Johnson. And the two weeks after this vote will be packed full of political scheming and increased noise, sending Sterling volatility shooting higher.

Will UK PM Boris Johnson Face a Vote of No-Confidence?

The UK is set to leave the European Union (EU) on October 31st, with or without a deal, and is the default position. UK PM Boris Johnson has repeated this throughout his short tenure as Prime Minister, much to the annoyance of a substantial part of Parliament, including a block of Conservative MPs, who want a no-deal exit taken off the table.

To this end, opposition and Labour leader Jeremy Corbyn is expected to call for a vote of no-confidence in the Prime Minister immediately the UK Parliament re-opens after its summer recess. If Corbyn is successful and wins the vote, there will follow 14 days of political wrangling and infighting, successful and unsuccessful pacts and promises and heightened Sterling volatility. While opposition leader Jeremy Corbyn may propose the bill, some members of Parliament who oppose a no-deal Brexit have already said that they will not back Corbyn as an interim PM. This political horse trading will boost Sterling volatility as various MPs, from all political parties, are proposed and rejected and various pacts suggested, agreed and then broken.

If Boris Johnson loses the confidence of the House, he will set the timetable for a General Election with October 25th as the first possible date (see timeline above). However, it is expected that if Johnson needs to call a General Election, it will be after October 31st, so he fulfils his promise that the UK leaves on that date.

What is the Brexit Backstop and How Does it Impact the British Pound

In the event that a no-confidence vote is passed, Sterling will swing sharply between September 3rd and September 17th as the market tries to price in all the alternatives on the table. The British Pound is currently weak – rightly so as the Brexit clock ticks down – while speculative investors are heavily short of Sterling against other currencies, using CFTC data.

The chart below shows that while Sterling GBP) shorts have been pared back marginally over the last two weeks, net short positioning is at extreme levels last seen over a year ago.

CFTC Sterling Speculative Net Positioning

This positioning will add to the British Pound volatility as any positive news – removing the no-deal exit option – will send GBP sharply higher against a background of a market heavily short of Sterling.

Sterling Volatility – A Measure of Risk

Volatility is a measure of the risk involved with the size of change of a currency over a set timeframe. The higher the number, the greater the expected price movement over a specific timeframe. The lower the number, the smaller the expected price movement.

The charts below show that 1-, 2- and 3-month GBPUSD and EURGBP volatility have all picked-up sharply as we near the October 31st exit date. This volatility is likely to remain at elevated levels over the next few weeks and may even trend back towards recent highs.

Foundation of Technical Analysis: Trading Volatility

Brexit Meetings and Unofficial Timetables.

Recent talks between UK PM Boris Johnson and German Chancellor Angela Merkel and French President Emmanuel Macron have also added another layer of volatility over the coming month. Both of the European leaders have challenged the UK to find an alternative to the Irish backstop ‘in the next 30 days’ to avoid a no-deal Brexit. UK PM Johnson has accepted this ‘blistering timetable’ and promised to ‘turbocharge’ efforts to find an acceptable solution for a new Irish border backstop.

In addition, UK political party conferences are set to take place between September and October, while an important EU Council meeting is scheduled for October 17-18, the last meeting before the Brexit deadline. This meeting will be the last chance to avert a no-deal Brexit.

Whatever happens over the next few weeks, and the options are many, Sterling (GBP) is in for a very bumpy ride all the way through to October 31st and very possible beyond.