TorFX Brexit Update: Where now for Sterling?

Brexit has been the main driver for the Pound this week, and with the recent votes on Prime Minister Theresa May’s withdrawal agreement, Sterling has had a bumpy ride.

Following the PM’s defeat in the House of Commons yesterday, there are now several possibilities before us. And with the hurdles of the next parliamentary votes to be overcome, the Pound could be due for more volatility.

However, with expectations running high over the likelihood of there being an extension to Article 50, there is still some hope that the Pound will hold onto its position of relative strength.

Pound Slumps and then Rallies on Yesterday’s Parliamentary Vote

The Pound (GBP) soared today following last night’s vote on Prime Minister Theresa May’s Brexit deal, which she lost by a Commons majority of 149. This followed on from some sharp losses earlier in yesterday’s session when it became clear the vote would be lost.

Today, meanwhile, will see a vote on whether to accept a no-deal Brexit, which similarly is not expected to pass.

This, in turn will likely be followed by another vote tomorrow on a possible extension of Article 50 – something that analysts expect will be approved by Parliament.

Hopes of a possible extension to the Brexit process have been buoyed today following recent comments from German Chancellor Angela Merkel who said that an extension of Article 50 until 30 June would be ‘easy’.

The EU’s Chief Brexit Negotiator, Michel Barnier, however, has caused some reason for doubts, as he made it clear the UK could not unilaterally extend negotiations:

‘Why would we extend these discussions? … The discussion on article 50 is done and dusted. We have the withdrawal agreement. It is there. President Juncker also said that there will be no further interpretations, no further assurances – we cannot go any further.’

Downing Street Concedes on a Free Vote on the Malthouse Compromise

Today saw another variable emerge in the form of Tory MPs threatening to resign if they were not provided a free vote on the ‘Malthouse Compromise’ amendment, which was swiftly granted by Downing Street.

The ‘Malthouse Compromise’ aims to allow the UK and EU to break free of the binary arguments being put forward and find a middle ground that involves a bilateral trade agreement and an extended period of transition.

A delegation of 15 Brexiteer MPs will meet at 4:30pm today and put forward their amendment which demands a delay to Brexit until 22 May to secure preparations for a no-deal.

This will then be followed by a ‘standstill’ agreement between the UK and the EU which would last until 2021, during which time the UK would pay into EU budgets and observe legal obligations.

The Pound has remained generally steady today on hopes that an extension of Article 50 will be the more likely outcome.

Brexit Going Forward: What Happens Next?

Sterling will remain highly sensitive to Brexit turbulence, with several more days of voting to go – if all goes as expected.

After today’s vote on a no-deal Brexit, which is generally expected to be voted down, we will see a vote on a possible delay to Brexit on Thursday, which is expected to pass.

Once the extension is put forward, this will then continue on to the EU, which is expected to authorise at least a two-month delay.

Following an extension there are then six possible outcomes, covering two polar opposite outcomes:

  • No-Deal – If the UK and the EU fail to renegotiate a deal during the extension period, the UK will likely leave the EU without any form of trade deal in place.
  • Renegotiation – A new deal would have to be drawn up and accepted by the EU, which would then be followed by yet another parliamentary vote for the newly amended deal to pass. Many are remaining cautious about the feasibility of this option, as EC President Jean-Claude Juncker has already warned that there is ‘no third chance’.
  • Second Brexit Referendum – Some Pound traders are hopeful for this outcome as it could potentially lead to the UK remaining in the EU if voters demonstrate a change of heart
  • General Election – A General Election has been raised frequently following Theresa May’s string of defeats and attempted vote of no-confidence.
  • Second Confidence Vote – With diminishing faith in Theresa May’s ability to negotiate a deal with the EU, MPs could table a motion of no-confidence which could, in turn, lead to a General Election.
  • Brexit is Abandoned – At the extreme other end, Brexit could be scrapped altogether by the revocation of Article 50. A statement from the European Court of Justice had previously stated that this could be done without interference from the EU and its Member States.

 

In conclusion, the Pound is likely to remain supported on any signs of a possible extension of Article 50 or of an emerging consensus between the UK and the EU, which will effectively end the current state of deadlock.

On the other hand, if at any point it seems that the UK is likely to crash out of the EU without a deal, analysts estimate that Sterling will lose up to 9% of its value against the majors.

David Moore

Contact David Moore


Related