British Pound Jumps as UK PM May Seeks Second Referendum on Brexit

Brexit Latest Talking Points:

• UK Prime Minister Theresa May appeared to be struggling to whip votes for a last-ditch vote on the EU-UK Withdrawal Agreement by the first week of June.

• Now, with the option of a second referendum on the Brexit issue, UK PM May is essentially offering a direct pathway to avoid a hard Brexit altogether.

• Retail traders are net-long GBPUSD, but recent changes give us a mixed GBPUSD trading bias.

Ahead of the early-June goal of getting one last vote in UK parliament on the EU-UK Withdrawal Agreement, as well as the European parliamentary elections this week, UK PM May is putting all options on the table. In what appears to be a last-ditch effort to prevent the UK from enduring a no deal, “hard Brexit,” UK Prime Minister Theresa May is apparently prepared to offer UK members of parliament an option for a second referendum.

The mere prospect of avoiding Brexit altogether has reinvigorated the British Pound, which had been on a multi-week losing streak thanks to the lack of progress on a Brexit deal during the cross-party talks between Tory party leader and UK PM Theresa May and Labour party leader Jeremy Corbyn.

According to the report from Sky News, which obtained a copy of the summary of the speech UK PM May is preparing to give, she will offer MPs chance to have a vote on whether the Brexit deal should be put to a second referendum. Additionally, the Sky News report says that MPs will be offered a choice of either (1) Mays customs arrangement, or (2) the compromise put forward in the Labour talks: a temporary customs union on goods only (which includes UK having say in relevant EU trade policy and the ability to change the arrangement in the future).

GBPUSD Technical Analysis: 5-minute Chart (May 21, 2019 Intraday) (Chart 1)

Immediately following the reports, the British Pound rallied against all of the major currencies. Notably, GBPUSD rallied from 1.2718 to as high as 1.2783 amid the news, before settling in at 1.2771 at the time this report was written. Amid the sharp rally, the near-term outlook for GBPUSD may not have any more clarity, given recent changes in sentiment and positioning.

IG Client Sentiment Index: GBPUSD (May 21, 2019) (Chart 2)

GBPUSD: Retail trader data shows 79.1% of traders are net-long with the ratio of traders long to short at 3.79 to 1. In fact, traders have remained net-long since May 06 when GBPUSD traded near 1.31656; price has moved 3.4% lower since then. The number of traders net-long is 0.6% higher than yesterday and 41.2% higher from last week, while the number of traders net-short is 32.4% higher than yesterday and 11.0% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBPUSD prices may continue to fall. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed GBPUSD trading bias.

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist