The Pound was this week’s unexpected top performer of all the major currencies this week. It strengthened significantly against the Euro and Dollar thanks to rising positive sentiment that a ‘no deal’ Brexit is not as likely in 5 weeks’ time on March 29.
Pounded sterling traded at the top of the range of recent months as investors and financial markets soaked up the news the United Kingdom will request an extension to the Brexit date. This will ultimately give the UK more time to negotiate outstanding issues such as the Irish backstop, sort out any political infighting across all parties and prepare logistically for the final day itself.
It’s heavily rumoured the European Union foresees a plea by Theresa May for a three-month technical delay to Brexit.
According to two inside sources close to the EU, discussions between the EU and UK claim the Prime Minister will ask for an extension subject to Parliament backing the current proposed Brexit deal. Another EU summit is in the diary for mid to late March for the proposal to be finalised.
Foreign exchange strategist, Elsa Lignos at RBC Capital Markets commented:
In the UK, EU officials say they expect May to ask for a three-month extension, though the ERG (Brexiteer Tory backbenchers) are threatening to bring down the government if May asks for any extension, by no longer voting for any government legislation. Is that a credible threat? The probability of Labour having the most seats at the next election is at its lowest since we started collecting data, but at 40% is still high enough to make us question whether the ERG will follow through.
All this news has been interpreted extremely positively across the majors in currency markets, for the GBP/EUR seeing the week high at 1.1538 and the low at 1.14. The Pound-to-Dollar rate ranged between a peak of 1.3105 and the low down at 1.2891.
The new analysis seems to show Prime Minister, Theresa May standing in a stronger position to have her proposed deal accepted by UK parliament. A woman who has had a slim majority at best of times doesn’t have much wiggle room but it now seems more achievable than it’s been for a while.
Cicero Group, a financial consultancy, looked at the statistics of past voting records of MPs in direct relation to Brexit based debates. They found May could afford to lose the support of more than 30 Tory MPs and still get her deal through the Commons. It’s not all a bed of roses as it would have to still have a large amount of support for her own Conservatives as well the troublesome DUP and a healthy amount of Labour MPs, about 25 according to Cicero.
This week was one of the most crushing and humiliating for the Labour Party as 7 respected MPs decided to defect to form their own group (no party name for now.) In the same week, Ian Austin on Friday announced he is quitting and Jeremy Corbyn’s leadership looks as weak and unstable as it’s ever been.
This news is positive for Sterling as foreign exchange markets view a Brexit deal as a best-case or at the very least a better-case for a currency that has declined in value due to uncertainty. A deal in some form will remove a significant amount of that uncertainty, allowing the currency to appreciate and at least give British based businesses an answer to design an investment strategy again.
In the art of fairness, 4 Conservative MPs also defected (pro remain) who blame May’s handling of Brexit negotiations for their departure. The defections from the Conservative Party could mean May has less chance now of securing sufficient support for her deal, but still possible.
However, in an opposing opinion after this week’s infighting and defection Stephen Gallo, European head of FX strategy at BMO Capital Markets is heavily bearish on finding a deal sighting a possible 8% fall:
The recent Labour & Conservative splits make us even more uneasy, and a ‘no deal’ Brexit remains our base case, at subjective odds of 53%.
The scenario is hard to call but still plausible. Carney has warned against it economically. It’s well documented that several MPs are threatening to move across to the newly formed independent party should the government fall to ‘no deal.’ If a political majority is surrendered, the process will likely see Theresa May finally go, a General Election called and a significant delay to the Brexit process. The markets reacted positively as they see the strategy being May’s deal being voted for, albeit reluctantly, the Brexit process finalised in March and some relative stability in parliament across all parties. And “groups”.