The Pound has risen on the crest of a wave over the last few weeks with rumours of a secret Brexit deal circulating in the media. Markets must have believed the hype as GB Pound exchange rates have held onto their gains this week, however, has seen the GBP devalue slightly whilst much of this has been due to more investor risk appetite following the US midterm elections a decline in GBP strength was also seen following the resignation of Jo Johnson. Mr Johnson the transport Minister and younger brother of Boris Johnson resigned dramatically on Friday.
Whilst many had anticipated resignations as the UK and EU approach the final part of an apparent deal, a hardened Remainer would have been a more unlikely candidate. Jo Johnson is calling for another referendum or people vote on Brexit or the final outcome. The resignation has once again highlighted the vulnerability, both of the predicament the UK finds itself in, but also the fragility of the UK government.
May ever reliant on a handful of party members and the DUP will almost certainly face opposition by either her own party, Labour or the DUP or all. Therefore, whatever the final deal looks like she may still face real issue getting the deal approved in parliament. If other remain supporters begin to bail she would have to then mount a major charm offensive to Labour MP’s in order to gain support.
Only cabinet members and high-ranking EU union officials would actually be capable to comment on this point. The FT, for example, is reporting that a draft treaty is close, whilst other media entities are reporting that hope will soon disappear due to continual issues with Irish border negotiations.
Despite multiple proposed solutions the UK and EU remain unable to apparently make progress on the border with none of the proposed solutions currently deemed as acceptable.
This impasse was once again highlighted by Michel Barnier this week who stated that there remained a ‘real point of divergence’ on the northern Ireland border issue. The delay caused by the Irish border issue has meant other parts of the deal have been put on ice. This includes a trade deal which once again will have to wait for a solution to the Irish hard border conundrum.
The continual delays which limit the possibility of a Brexit summit being held in November therefore limit the possibility of a deal being finalised before the end of the month. The EU remain very clear, December is too late to agree to an arrangement, therefore expect GBP exchange rate movement in the coming weeks.
The Pound was propelled significantly on headlines that a deal was close and that a deal for the financial services was apparently struck with the EU. The GBP/EUR rate accelerated from the mid 1.12’s and have traded comfortably above the 1.14 for the majority of the week. The high was seen on Friday before Jo Johnson’s resignation, the GBP/EUR pair touching 1.1504.
Whilst only the transport minister’s resignation was able to knock sterling off its run. This was despite the UK last growth figures being published just a few hours before, The UK registering 0.6% growth in the last 3 months in line with the Bank of England’s forecasts. The growth highlighting the most significant quarterly growth since the 4th quarter of 2016.
The strength or weakness of GB Pound exchange rates will almost solely depend on the development of the UK and EU Brexit talks. Either concession will be made, no deal will be announced, or the deadline will be prolonged, the 3rd option forcing the UK to show their cards. Whilst realistically both sides want a deal, the weakness of the UK government could find the party backed into a corner.
If May’s MP’s fail to support, her and announce a vote of no confidence the party opens itself up to an election battle and potential loss. Although certain Labour party members could provide her with a life line subject to the deal proposed.
In the short term expect GBP to lose some ground, media outlets are reporting 4 possible further resignations. With rates being so closely driven by political news this news will almost certainly see a sell off in GBP Monday. However, if these resignations fail to materialise expect the GBP to strengthen off the back of positive Brexit rumours and the recent growth figures which were published on Friday.