Above: Boris Johnson. Image © Chatham House, Accessed Flickr, image subject to CC licensing.
– GBP/EUR @ 1.0786 +0.56% | GBP/USD @ 1.2098 +0.64%
– MPs said to be working on credible route to preventing ‘no deal’ Brexit
– Sterling seen higher in Monday trade
– However, IfG says ability of Parliament to block ‘no deal’ effectively not possible
The British Pound is higher on Monday in a move that coincides with fresh reports that there are in fact still credible routes that can be explored by MPs wishing to prevent a ‘no deal’ Brexit.
Sterling has been under pressure over recent days and weeks as it became increasingly clear that Prime Minister Boris Johnson could deliver a ‘no deal’ Brexit if he truly desired such an outcome, and all indications thus far in his young premiership suggest he is intent on doing so.
From a currency perspective, it is therefore likely that any suggestions that MPs do in fact still have options to thwart the Prime Minister’s intentions would potentially prove supportive to Sterling.
“There were some developments on that over the weekend which could suggest some upside risk for the Pound,” says Fritz Louw, a Currency Analyst with MUFG.
Louw references a report in the Times that says “MPs are drawing up plans to compel Boris Johnson to break his “do or die” pledge and force him to request an 11th-hour Brexit extension from the European Union.”
According to the report, MPs would look to bring down the Government in a no-confidence vote. However, instead of forming a new administration in the 14 days stipulated by the Fixed Parliament Act, MPs will try introduce new legislation.
This legislation will state that the Government must ask for a Brexit extension before calling a mandatory General Election.
After all, if no alternative government is formed within 14 days, a General Election must be held.
This document has reportedly been discussed with Labour leadership and it has also been signed off by Dominic Grieve and circulated among 300 MPs who support a second referendum.
“It would be counterproductive to spell out the precise mechanism(s) through which this might be achieved, but we must be clear about the principle — a general election must not be used as a device to get a no deal or any other form of Brexit over the line without the public having their say,” the document says.
The report is significant in that it is the first real sign that there remain options to prevent a ‘no deal’.
Markets have of late steadily been ramping up expectations for a ‘no deal’, and this is most clearly expressed through the selling of Sterling.
If the tide against ‘no deal’ were to turn, then perhaps Sterling’s fortunes would also shift to the upside.
The reports come as the Pound-to-Euro exchange rate is quoted at 1.0803: the exchange rate had been as low as 1.0638 last week but there has been a ‘gap’ higher of 0.75% as the pair recovered at the start of the week:
The Pound-to-Dollar exchange rate is quoted at 1.2061, a decent 0.35% higher on the day.
In fact we are seeing Sterling higher across the board at the time of writing.
“GBP is up against most major currencies this morning. The Times reported UK lawmakers are drawing up plans to force Prime Minister Boris Johnson to seek an extension to the 31 October Brexit deadline. Nevertheless, the risk of a hard‑Brexit remains high and will continue to undermine GBP,” says Elias Haddad, a foreign exchange strategist with CBA.
Indeed, we note in our ‘week ahead’ forecast report that GBP/EUR remains in an entrenched downtrend and weakness is ultimately preferred with any strength likely to be short-term in nature.
The same overarching downtrend is evident in most major Sterling exchange rates, including the GBP/USD.
“After carving out new 2019 lows both against the Euro and the US dollar on Friday, this morning Sterling is drawing breath and attempting to regain ground against a basket of currencies,” says Andy Demetriades, Director of Treasury Solutions & Partnerships at Caxton FX. “However, I suspect the bounce we are seeing this morning will be moderate and limited in nature before renewed selling pressure appears.”
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The Institute for Government says MPs Have Run out of Road
As the Times reports that MPs have options available to them, a report out by the Institute for Government (IfG) suggests MPs looking to prevent a ‘no deal’ have run out of road.
In a new white paper, the IfG reaches the following conclusions about what is likely to happen over the next few months:
- It is very unlikely the UK will be able to leave the EU with a deal on 31 October
- MPs can express opposition to no deal but that alone will not prevent it
- Backbenchers have very few opportunities to legislate to stop no deal
- A vote of no-confidence would not necessarily stop ‘no deal’
- There is little time to hold a general election before 31 October
- A second referendum can only happen with government support.
“The government could ignore MPs’ opposition to no deal. Simply voting against it in principle would not require the government to act, nor would it change the law – both domestic and international. There is very little legislation the government needs to pass before 31 October, and amending or voting it down would only limit the government’s powers in the event of no deal, not prevent no deal itself,” says Maddy Thimont Jack at The Institute for Government.
The IfG provide research and analysis on issues of UK governance, and are therefore widely referenced in the current environment where parliamentary process is under unprecedented scrutiny.
“MPs and the government are preparing for a Brexit showdown in September and October. But when Parliament overwhelmingly voted in favour of triggering Article 50, the legal default was set: if no deal is agreed, the UK leaves the EU without one,” says Thimont Jack.
According to the IfG, if Johnson is set on delivering a ‘no deal’on October 31 he will not need to schedule any further meaningful votes.
“Unlike May’s government, therefore, Johnson’s will be under no legally binding requirement to consult, inform or gain the agreement of the Commons. The government’s control of the Commons order paper, coupled with its ability to bring motions and deploy delaying tactics, now mean that it has a great deal of control over what happens in the lower House,” says Thimont Jack.
The takeaway from today’s political reportage is that there remains a great deal to play for in the opening weeks of September, and we would expect currency markets to be particularly volatile during this period as it becomes clear which side in the great Brexit debate is correct.
However, it would also likely become abundantly clear as to whether a ‘no deal’ Brexit will transpire, and this is a sizeable risk on Sterling’s horizon.
“My strongest view remains that GBP has further to fall in order to catch up with recent political developments. The consensus view, I believe, has always been that ultimately a soft Brexit deal would be negotiated or better still a 2nd referendum would avert. The odds on this have shifted markedly in the past days and weeks and despite recent weakness I suspect the GBP needs to fall further,” says Jonathan Pierce, on the sales and trading desk at Credit Suisse.
Looking ahead, there are a number of major economic data releases out this week which could provide some near-term turbulence for Sterling.
We saw last week how a negative GDP read triggered a fresh sell-off in the currency.
The highlight of the docket will be tomorrow’s labour market report, with wage dynamics being the figure to watch.
Then on Wednesday inflation numbers will be released: if either wage or inflation data disappoint we could see further selling. If the numbers beat expectations then the Pound’s shallow bounce could grow some legs.
“The Pound’s ability so far to hold above a key psychological floor has slowed its decline. Key for sterling this week will be U.K. data on unemployment and inflation that will shed light on how close Britain may be to tipping into recession,” says Joe Manimbo, a foreign exchange analyst with Western Union.
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