Brexit’s Tug Of War with the Pound

Following the announcement by Theresa May to put no-deal to a vote in Parliament the pound rallied to a 9-month high of just over $1.33 but the optimism dissipated quickly as the main deal was voted down, but thankfully for businesses and the UK no-deal was also rejected.

xe.com GBP:USD Graph

On Wednesday alone trading ended 1.5% higher against the dollar at $1.3257 and 1% higher against the Euro at €1.17 recovering from the earlier losses after Geoffrey Cox, Attorney General, choose law over politics sharing a view that nothing had changed regarding the legal status of the backstop, and that Britain, even with the revised deal could find itself trapped in a customs union with the EU. There are several caveats and potential shocks that could shed current optimism, but the avoidance of no-deal has been enough to trigger this rocky rally. Goldman Sachs predict that the pound could rise towards €1.25 but recommended caution as too lengthy of a divorce could overlap with general election opening gates to more uncertainty, new plans even a second referendum to name a few of the potential downsides.  

With sterling currently bobbing around on a sea of uncertainty 6 options remain for MP’s:

1. A third vote on Theresa’s deal
2. Renegotiation
3. Referendum
4. General Election
5. Vote of no Confidence
6. No Brexit.

Following an overwhelming vote by MP’s to extend the Brexit deadline on Thursday, the uncertainty surrounding the future of the UK’s status remains in limbo. Donald Tusk, President of the European Council, is open to a “long extension” which adds to Eurosceptic dismay and adds even more pressure to accept and pass a third vote on the Prime Minister’s deal:

Donald Tusk Brexit Extension Tweet

In a slight change of tune Mr Hammond, UK chancellor of the exchequer, said on Thursday that MP’s had “to explore other options for Parliament to express a view about how we resolve this impasse”. Previously he had been an advocate of a softer Brexit but seems spooked by what could be a lengthy departure with some commentators expecting proceedings well beyond 2020. He has also handed Eurosceptic MP’s and the house at large a dangling carrot as he claims austerity could be eased if the UK avoids a disorderly exit, piling even more pressure to vote the Prime Ministers deal through next week. The UK’s rate of borrowing is at its lowest since 2002 sitting at just 1.1% of GDP and this leaves some headroom for an extra £15bn if Britain leaves on good terms. The alternative options remain bleak if the UK does indeed leave without a good deal and any long term delay could even see Britain partake in European elections, adding yet another reason for Eurosceptic MP’s to turn.

On the back of recent events UK Gilt bonds have been sold off as a no-deal scenario became a thing of the past pushing yields up 1.23% as investors felt a relative ease. The FTSE 250, which is a good indicator of UK domestic stock, also gained 0.8% from the news and sterling is currently trading at $1.32346 up some 5% since December’s lows. Keep an eye on events as the road ahead is far from pain sailing.

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