Retail Market Positioned Incorrectly Following May’s Brexit Bill Defeat

What Happened Theresa?

Once again, Theresa May has suffered a heavy parliamentary defeat. The PM’s amended Brexit bill was defeated, this time by a margin of 149 votes. This was down from the original 230, showing at least some progress.

However, May’s efforts were not enough, and the country is now staring down the barrel of even greater uncertainty.

What Next?

The result is not necessarily the terrible outcome that tabloid media would have you believe. May had announced prior to this second vote that should it fail, MPs would be called upon to vote again today, on March 13^th. 

Today’s vote will be to determine whether the government should press ahead with a no-deal Brexit. Should the MPs vote against a no-deal, they will vote again tomorrow, Thursday March 14th. Tomorrow’s vote will be to decide whether to ask the EU for an extension to the Article 50 process.

Article 50 Extension Most Likely

Ahead of tomorrow’s vote, it seems highly likely that the House of Commons will vote in favor of seeking an extension. If granted by the EU, this would essentially put Brexit on an indefinite hiatus.

An extended Brexit deadline would give the UK and the EU more time to come to a suitable agreement. All the while, it would maintain the current status quo regarding the UK’s status within the EU.

Importantly, all travel, legal and customs matters would remain unchanged.

Might Brexit Be Avoided Altogether?

Indeed, if the UK does enter into such a limbo, bigger questions will start to arise such as, will there be a second UK referendum? Will the UK even leave the EU at all?

Parliament cheered yesterday when May mentioned the possibility of a second referendum, saying:

“This house will have to answer that question…Does it wish to revoke Article 50? Does it want to hold a second referendum, or does it want to leave with a deal but not this deal? These are unenviable choices, but thanks to the decision the house has made this evening they must now be faced.”

While for now, tomorrow’s vote will simply be on whether the UK should agree to a no-deal, it seems increasingly likely that we could see further voting, potentially even a public vote, going forward.

Retail Market Gets It Wrong Again

The retail market typically has a hard time when it comes to catching turns in the markets. Usually, what we see is the retail market positioned correctly ahead of a turn. However, it then starts to scale back its position before the move happens or joins too late once it does. Yesterday’s vote was no different.

Looking at the image above you can see that the retail market was building short positions earlier in the day, but then closed them out as the vote approached. During this time, time price dropped.

The vote happened, and we then saw quite volatile, whipsawing action. Subsequently, price has started to drift higher as retail traders once again build short positions.

Why Do Retailers Struggle?

The disconnect here is the tabloid media’s negative portrayal of the current Brexit situation and the retail market’s tendency to making trading decisions using inferior information sources.

While the government has once again suffered a defeat and we are headed for another vote tomorrow, the chances of a no deal Brexit have actually decreased. Nowe, we are far more likely to see parliament backing an extension to Article 50.

This will essentially see Brexit postponed and in the near term, should stem UK investor outflow, keeping GBP and UK assets supported.

Opportunities on The Horizon

Indeed, looking at the positioning graphic, we can see that shorts have plenty more room to build further. This means that GBP can easily squeeze higher still from here which we are likely to see in response to tomorrow’s vote. Indeed, the current technical landscape suggests the risk of a sharp reversal higher.

Technical Perspective

GBPUSD remains supported within the bullish channel which has framed price action since the 2018 lows. The market continues to put support on the 1.33 region, which is now the neckline of a large inverted head and shoulders pattern.

A break of 1.33 will open the way for a move up to test the next resistance levels around 1.3470s and 1.3650s – 1.37. There, we also have the long term bearish trend line from 2014 highs, which will be the real line in the sand for bulls. A break of that level could signal a much longer-term reversal underway.