What does Brexit mean for the Pound?”

 

Pound Sterling fell sharply after the UK parliament for a second time failed to unite behind any preferred ‘softer’ Brexit scenario following a series of unsuccessful votes in the House of Commons on Monday, April 01; but the currency should remain protected against serious downside in the short-term on suggestions parliament’s failure allows the government to regain the initiative on Brexit.

Following the defeat of the ‘softer’ Brexit options put before the House, the British Pound is seen trading in the middle of a range that has been in place since early March against the Euro with 1 GBP buying 1.1666 EUR, meanwhile the UK unit is trading towards the bottom of its March range against the U.S. Dollar with 1 GBP buying 1.3073 USD. The price action is consistent with a currency that believes the UK will not be leaving the EU without a Brexit deal in place on April 12; the date the UK is officially due to leave the European Union. Markets are betting that either a deal will be done, or a lengthy delay will be agreed between the EU and UK that will involve the UK taking part in European parliamentary elections.

“Sterling remains above the key $1.30 and €1.16 levels despite Parliament failing to find a majority for an alternative way forward on Brexit last night. Despite political headwinds facing the Pound intensifying and the stalemate in Westminster continuing, Sterling is likely to remain within its current range,” says Michael Brown, Senior Analyst at Caxton FX.

Brown says there will however possibly be “pressure to the downside”, until decisive action is taken to break the impasse, something which becomes more likely as we edge closer to the April 12 Brexit deadline. The three ‘soft’ Brexit options voted on by parliament – a customs union, “Common Market 2.0” and a confirmatory public vote – were rejected by smaller margins than May’s deal on Friday but they notably also got fewer ‘ayes’ due to MPs abstaining. Brexit Secretary Stephen Barclay told the House of Commons following Monday’s round of votes that the only option for the country is to find a way forward that allows the UK to leave with a deal.

 

“The government continues to believe that the best course of action is to do so as soon as possible. If the House were to agree a deal this week it may still be possible to avoid holding European parliamentary elections,” says Barclay. Speculation in the UK press – and Barclay’s talk of a deal ‘this week’ – suggests the Prime Minister might indeed bring back her deal for a fourth vote attempt this week. Should a deal pass, we would expect Pound Sterling to move sharply higher and break out of its March-April trading range against the Euro and U.S. Dollar. According to Danske Bank, if a deal were to be passed, the Pound-to-Euro exchange rate would rally to 1.2050.

 

However, at this juncture there is scant indication that those dedicated opponents to the Brexit deal are ready to yield and the prospect of a timely delay to Brexit is increasing. Those watching the Pound should not fear an extension: analysts at Danske Bank – the Scandinavian lender – say the Pound-to-Euro exchange rate would benefit on a long extension to Brexit, with a break of 1.1765 taking place and a range of 1.19-1.16 being adopted by the pair. Today sees the Prime Minister Theresa May’s Cabinet meet to discuss the way forward in light of parliament’s inability to back any alternative course to her deal.

 

Importantly, it appears that May’s Brexit deal remains the most popular option with Conservative party MPs at this point in time, and she will feel she has more leverage on the process than she did ahead of the rcent indicative votes. We believe that on balance the government regaining the initiative will protect Sterling against substantial downside near-term: the currency fell in the immediate aftermath of parliament’s inability to unite behind a ‘softer’ Brexit but we are seeing consolidation taking place in Tuesday trade:

Pound following votes

Above: Sterling drops on outcome of series of indicative votes, but ultimately looks to be well supported. Looking ahead, we feel readers should beware the prospect of a General Election taking place in order to break the deadlock: an outcome we believe would be negative for the Pound which tends to fall in times of political uncertainty.

 

According to the Times, May intends to “confront the cabinet with the reality of an election today as they weigh up various dramatic options to break the deadlock”. Cabinet will apparently be shown internal Conservative polling on the impact of a general election on the party at the session’s start. For now we believe May will use the threat of an election to merely pressure her party into backing her deal. But, should it become apparent to markets that the threats might actually be delivered on, the Pound would likely sink. We must also be wary that dedicated opponents to the deal in the Conservative party have indicated they would in fact welcome an election as they believe they represent the mood of a frustrated electorate.

 

Steve Baker, a prominent opponent of May’s Brexit deal, has warned the possibility of a general election was now “coming on to the table,” suggesting he would welcome a new vote ahead of signing up for the deal. Speaking on BBC’s Politics Live, Baker castigated those Conservative MPs who support the deal as “fools and knaves and cowards” with an “addiction to power.”

He suggested he may resign as a Conservative MP:

“At this point I can see no circumstances while as a Conservative MP, I voted against the Government in a confidence motion. “But we are approaching a point where the stakes are so very high and so transcend party politics and what this country is about and the fundamental British value that political power rests on consent that I think these things are coming on to the table.”

“We cannot rule out a general election if the Conservative Party implodes,” says Arne Lohmann Rasmussen, an analyst with Danske Bank. “With only 10 days left to Brexit, our base case remains a long extension but it may require EU leaders accepting there is no plan at the moment.”

An extraordinary EU summit on Brexit takes place on April 10.

“We think the probability of a no deal Brexit is low but not negligible,” says Rasmussen, adding:

“We believe EUR/GBP will stay in the 0.85-0.87 range until we get more clarification, which we should get soon given Brexit day is 12 April. If the UK leaves without a deal, we should see EUR/GBP move towards parity.”

 

The 0.85-0.87 range in EUR/GBP highlighted by Rasmussen gives a GBP/EUR range of 1.1760-1.15.

2019-04-03T11:12:37+00:00