Pound-to-Euro Exchange Rate Holds 1.10

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Pound Sterling is consolidating as markets digest the implications of Prime Minister Boris Johnson's decision to suspend parliament for a month, a move that starves remain-leaning MPs of the space required to introduce legislation that might block a 'no deal' Brexit.

The Pound's initial reaction to news that the government was looking to suspend parliament from 12 September until 14 October saw the Pound take a sharp dip, however it ultimately recovered much of the declines as markets gauged the Brexit landscape remains largely unaltered by the move.

Indeed, Johnson's assertion that there remains "ample time" for parliament to debate Brexit has some merit.

The GBP/EUR exchange rate is quoted at 1.1013 at the time of writing, the pair had fallen as low as 1.0963 on Wednesday morning.

By suspending parliament Johnson has ultimately shuffled the deck in his favour: MPs have just one week to try and pass legislation before the suspension begins. Parliament will then open one week prior to a key meeting of European leaders at which it will be decided whether a new Brexit deal should be agreed.

There will be two weeks following the summit of EU leaders within which to ratify any reworked deal, placing enormous pressures on parliament to get behind a deal.

According to Richard Grace, FX Strategist with CBA, "the downward pressure on GBP is because the timeframe leaves MPs opposing a no‑deal Brexit with very little time to pass legislation that would prevent a hard/no deal Brexit on 31 October."

However, we believe Sterling could have gone a great deal lower if markets believed the decision to suspend parliament has greatly increased the odds of a 'no deal' Brexit.

Our reading is that the prospect of a deal being passed before the October 31 deadline remains decent, hence why the Pound is holding onto the lion's share of the gains made over the past two weeks.

"Is there a method to Johnson’s madness? There may be," says Marshall Gittler, a strategist with ACLS Global. "He probably believes that the main reason the EU isn’t giving in over the issue of the Irish backstop is the hope that Parliament will somehow stop the Brexit process and ask for an extension or even cancel the whole thing. By removing that hope, he puts more pressure on the EU to compromise."

There is however a heightened chance that MPs opposed to Johnson's latest strategy vote down his government in a no-confidence vote when parliament returns on September 03. Labour leader Jeremy Corbyn might well feel emboldened and call a vote against the government following this week's events.

It is too difficult to gauge where the numbers on any such vote lie: yes some Conservative MPs will not like what is happened, but will they be of a different opinion following a weekend of contemplation?

If the government does fall then it is up to the opposition parties to vote in a caretaker government, this we feel is highly unlikely given a distinct distrust of Corbyn by many independent MPs and Liberal Democrat MPs.

There is a danger that the on losing a vote the existing government carries on in zombie-like fashion into a new election which would fall after Brexit deay on October 31.

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