Pound Sterling at Risk of Fresh Breakdown vs. Euro, Labour said to be Readying No-Confidence Vote on Incoming PM's Government

Stock photo Johnson

Above: File image of Boris Johnson, widely-tipped to be the next UK Prime Minister. Image © Foreign and Commonwealth Office

- Euro gathers momentum vs. Sterling

- But, GBP/EUR seen leaning on near-term support

- Labour will attempt to collapse government in late July: reports

The British Pound is battling to defend a key 'line in the sand' against the Euro at the start of what is expected to be another difficult week for the UK currency against its Eurozone rival.

1 GBP buys 1.1197 EUR on the inter-bank markets at the time of writing, but the exchange rate had been as high as 1.17 just six weeks ago.

Peter Stoneham, Global Managing Analyst at Thomson Reuters, notes the Euro is gaining traction for a run at its recent highs against the British Pound, but in the immediate-term he awaits clear signals that the Euro is in fact about to make any major breakthrough.

"Bulls are back in control," says Stoneham, after Friday's strong move higher in the Euro. But while Stoneham does note a pick-up in bullish momentum for the Euro, he does express concern that a momentum indicator - the RSI - is struggling to 'confirm' the latest bull push.

"We stand aside and await stronger signals," says Stoneham.

Concerning the near-term outlook, Stoneham says the June 18 low of 1.1176 in GBP/EUR remains a key support that must be watched. Support levels can often arrest declines, but if they are broken the decline can tend to accelerate as orders are swept out of the market.

The Euro's strength on Friday forced the Pound-to-Euro exchange rate lower with a sharp drop from 1.1255 to 1.1170 being recorded amidst a slew of decisive statements from EU leaders and officials that there would be no renegotiating of the Brexit Withdrawal Agreement.

The decline in Sterling also comes as markets weigh up increasing probabilities of a 'no deal' Brexit and/or another General Election taking place in 2019.

The mix of uncertainty makes buying the UK currency an unattractive prospect for speculators and investors alike.

The next Conservative Prime Minister will inherit a Government that can only command a majority of three in the House of Commons, meaning a mere handful of defections by Conservative Party MPs opposed to the incoming PM's Brexit plan could topple the Government.

The opposition Labour Party is widely cited as being ready to call a no-confidence vote in the Government at a time they think they have the crucial shift in balance.

The Fixed-term Parliaments Act rules that a five-year term exist between General Elections, but a General Election can be triggered by either 1) a 2/3 majority in the House of Commons passing a vote calling for an election, or 2) if a no-confidence vote is tabled by the opposition and subsequently lost by the Government.

Under scenario 2, there is a 14 calendar-day period in which an alternative Government may be confirmed by Parliament.

But because there is little likelihood of Labour forming a government, even with the help of a sympathetic Liberal Democrat party, a General Election will almost certainly then be called.

"That means an election in mid-to-late August. I’m not sure how many MPs would really want that,” a Conservative MP told The Times. Julian Smith, the chief whip, meanwhile also told The Times thatThe Times that two Conservative MPs are on a watch-list for defection, and that Labour are expected to institute a 'three line' whip on their MPs to force a no-confidence vote on July 25 - the incoming PM's first day in office.

Tobias Ellwood, the junior defence minister, has meanwhile told the BBC it is possible that the decision by a future Prime Minister to actively seek 'no deal' could push some Conservatives to support a no-confidence motion against the Government.

“I believe that absolutely is the case,” Ellwood said. “I think a dozen or so members of parliament would be on our side, would be voting against supporting a no deal and that would include ministers as well as backbenchers.”

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Bookmakers Ladbrokes are on Monday seeing a 36.4% probability of a General Election taking place in 2019, William Hill see a 42% probability.

In early June betting markets were applying a ~20% likelihood of a General Election before the end of 2019.

The rise in odds of a General Election over recent days has coincided with ongoing softness in Sterling.

"The more the Tories push for Boris Johnson... the more likely it is that Jeremy Corbyn comes to power," says Thanos Papasavvas at ABP Invest. "Why? Because Boris would march back to Brussels to re-open the negotiations and on being rebuffed would call for a no-deal Brexit. However, as there is no appetite for a no-deal Brexit amongst MPs, which the House of Commons would have to vote for, it brings us to a stalemate and general elections!"

ABP Invest turned Negative on the British Pound in mid-March largely on the belief the currency markets are under-estimating the potential of a Labour government taking the reins.

The call appears to be an astute one, as at the time Sterling was a great deal stronger and climbing.

"The market will likely assign a higher probability to 'No Deal' Brexit and a greater chance of a general election," says Dominic Bunning, a currency analyst with HSBC in London. "The risk of another significant change in politics – whether because of a change in Government or a significant shift in UK-EU relations – will likely create enough uncertainty to keep GBP soft for the near future."

Elsewhere, we are told Sterling will benefit if Jeremy Hunt unexpectedly beats Boris Johnson in the race to succeed Theresa May as Britain's prime minister.

According to Peter Stoneham, an options analyst at Thomson Reuters, hopes that Brexit would be softer under Hunt than Johnson would be the factor driving a stronger Sterling.

Hunt has said he is prepared to delay Brexit beyond October 31 if circumstances dictate, but he remains the outsider in the two-way contest.

Bookmakers have shortened the odds of him winning after reports the police were called in response to a noisy row between Boris Johnson and his girlfriend.

Hunt now has a 22% probability of becoming the next Prime Minister with Ladbrokes, up from 11% ahead of the Johnson row reports.

Johnson remains the odds-on favourite, but those odds have drifted to a best price of 2/9 with Betway and William Hill (he was 1/20 with Betway 72 hours ago).

BannerTime to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

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