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– Sterling holds towards the top of recent range at start of new week
– Rally comes as DUP said to reject customs union ammendments
– Govt. to introduce WAB to Parliament today
– Analysts give views on where they see the Pound going
– Pound-to-Euro exchange rate today: 1.1640, up 0.67%
– Pound-to-Dollar exchange rate today: 1.2982, up 0.64%
Pound Sterling on Monday hit its highest levels against the Dollar since May 13, and was near a 5-and-a-half-month high against the Euro, as markets bet the UK Prime Minister now had the numbers to pass a Brexit deal.
Boris Johnson needs 320 MPs to back his deal when it is first put to the Houes of Commons on Tuesday in the form of the Withdrawal Agreement Bill (WAB).
“A lot of uncertainty remains on process and technical procedures at this point, but at the very least, developments on Brexit appear to be headed in a better direction,” says Mazen Issa, Senior FX Strategist with TD Securities. “At this point, GBP is trading fairly convincingly on its front-foot, as the risk of “No Deal” scenario moves further into the tail. This should leave the market content in buying into cable dips.”
The Department for Exiting the European Union has confirmed the WAB will be published and introduced to the House of Commons today.
“This is the chance to leave the EU with a deal on October 31. If Parliament wants to respect the referendum, it must back the bill,” says Secretary of State for Exiting the EU, Stephen Barclay.
The WAB is the actual legislation required to enact the Brexit deal, and the Government is expected to proceed by first presenting the ‘programme motion’ required to pass the WAB through Parliament. The ‘programme motion’ will potentially detail late-night sittings, and perhaps even weekend sittings, to allow the legislation to pass before October 31.
The base-case assumption remains that there are more gains ahead for the Pound if a Brexit deal is passed.
Downside potential in the currency has meanwhile been markedly reduced as the odds of a ‘no deal’ Brexit have reduced materially of late, and we would only expect declines back to the August lows if ‘no deal’ risks start to rise again. For now this remains unlikely.
The Labour Party is said to be ready to table amendments to the WAB in an attempt to wreck the Government’s attempt at passing a deal, these includes making the UK stay in the EU customs union, as well as any final Brexit deal being put to a second referendum.
If either are successful, the Government would consider the legislation to have been wrecked, and would therefore likely pull legislation, such an outcome would potentially weigh on Sterling.
However, news that the DUP will unlikely back a customs union ammendment has got markets betting the move will fail, giving Johnson a clean shot at passing his deal. Markets meanwhile believe the numbers to attach a second EU referendum to the WAB are simply not there.
The news that the DUP wouldn’t back the Customs Union ammendment is being credited by some market watchers as being behind a tick higher in Sterling seen on Monday, as it would most likely require the DUP to be onside with rebels in order to garner the numbers to be successful.
“GBP is rallying after Jim Shannon of Northern Ireland’s Democratic Unionist Party said he doesn’t think the part can support a Customs Union amendment proposed by the opposition. This means that UK PM Johnson’s chances of defeating that move by the opposition have risen,” says Rory Manley, an FX salesperson at UBS.
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What does this all Mean for the Pound?
Berenberg, the investment bank, have told clients they believe the chances of an orderly Brexit taking place have increased substantially following this weekend’s events, and this should keep the Pound well supported.
“UK Prime Minister Boris Johnson suffered another setback on “super Saturday” when the UK parliament delayed the meaningful vote on his new Brexit deal. Johnson even had to ask the EU for another Brexit delay, which he did in a decidedly odd way. However, the outcome is no reason to sell UK assets or Sterling, in our view,” says Kallum Pickering, Senior Economist with Berenberg Bank.
There are two reasons why Pickering believes the odds of an orderly Brexit taking place via the passing of a Brexit deal.
1) “The Eurosceptic wing of his party is now backing a deal for an orderly Brexit. With 322 to 306, the Saturday vote was already close.
2) “This vote closed the last legal loophole that might have led to a hard Brexit on 31 October. Some of those rebel Conservatives, independents and pro-Brexit Labour members of parliament who did not vote for Johnson on Saturday because they do not trust him may now be ready to support the new Brexit deal.”
Berenberg therefore raise the chance of an orderly Brexit from 35% to 75%, with a 60% probability that the UK parliament will accept the new Brexit deal before 31 October.
Paul Meggyesi, FX Strategist with JP Morgan says an agreement should keep Sterling rallies alive.
JP Morgan recently shifted their baseline odds for a near-term Brexit under a revised withdrawal agreement to 50%, with a further extension coming in at 45%.
‘No deal’ Brexit odds are now set at just 5%.
“The pricing out of no-deal should mean further GBP/USD rallies towards 1.30, but strength beyond that should be capped by the reality that even a negotiated exit will subject the UK economy to frictions and disruptions that will demand an ongoing GBP discount,” says Meggyesi.
Elsa Lignos, a foreign exchange strategist with RBC Capital Markets says the odds of Tuesday’s de facto vote on Brexit passing are high, noting that bookies are offering odds of 2/3 for such an outcome.
“While GBP opened softer in Asia (on a perceived overhang of uncertainty), the numbers are actually shaping up in the govt’s favour. The Letwin amendment has paved the way for more Tory rebels to back Johnson, and having been estimated at a few votes short on Saturday, most expect the govt will reach the magic 320 tomorrow,” says Lignos.
Foreign exchange strategist Marc-André Fongern at MAF Global Forex says a ‘no deal’ Brexit is now “basically off the table”, and Sterling should remain relatively well supported as a result.
“Boris either succeeds in convincing parliamentarians to accept his deal in order to achieve a majority, or the political drama goes into overtime. More time may indeed be needed!,” says Fongern, adding:
“I consider both options to be rather supportive for the UK Pound, as a certain sense of optimism may prevail despite parliamentary quarrels. A ratified agreement is still perfectly achievable.”
Ulrich Leuchtmann, Head of FX & Commodity Research at Commerzbank says the risk of a ‘no deal’ has been overcome after Johnson requested a Brexit extension from the EU, and this is “GBP positive new.”
“The worst case scenario of Johnson finding some procedural trick to avoid the requirements of the Benn Act (which requires the Prime Minister to ask for an extension) or openly breaking the Benn Act has been avoided. That would have ended in a no deal Brexit on 31st October. This risk has been overcome,” says Leuchtmann.
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