Buy Euros, Sell Pound Sterling says FX Tactician Eyeing Troubled Summer for GBP

- Expect Brexit headlines to increase and potentially weigh on the Pound

- Tactical opportunity seen in selling Sterling as questions over Prime Minister May's leadership increase

- Euro to be boosted by ECB policy, fading Italian risks

Barnier and David Davis Brexit negotiations

Above: Brexit negotiations are fraught, posing renewed risks for Sterling we are told. Image © European Union, 2018  / Source: EC - Audiovisual Service  /  Photo: Mauro Bottaro

The British Pound is likely to weaken against the European single currency in June, according to strategists at TD Securities, who have told clients that domestic politics and the latest Brexit deadline have soured, offering a tactical opportunity in selling Pound Sterling against the Euro.

UK Prime Minister Theresa May faces a series of votes in the House of Commons on Tuesday 12, June on whether to approve 15 “Brexit wrecking” amendments inserted into the EU Withdrawal Bill by the House of Lords.

If the Prime Minister loses the votes, which some reports have suggested she might, then the UK will be required by law to remain a member of the EU single market and customs union and the House of Commons will have the power to send government back to the negotiating table if MPs are not happy with the final arrangements negotiated by Theresa May.

“This could raise questions about May's leadership, and could potentially pivot the Brexit negotiations sharply,” says Mazen Issa, an FX strategist at TD Securities.

Such an outcome could reduce the prospect of a so called hard Brexit, where the UK leaves the EU in March 2019 without any arrangements for future trade in place, but may also dramatically raise the prospect of a challenge to PM May’s leadership.

That latter consequence would heighten the risk of another general election being called and, according to some, raise the prospect of a Labour Party government which poses a "severely" negative development for Pound Sterling.

“If the government manages to win all the key votes (a possibility), then it's likely we continue down the road to the late-June EU leaders summit, where the EU had expected a final Ireland proposal, but the UK has already said they won't have it ready,” Issa adds.

PM May is also under growing pressure to present another plan for managing the Northern Irish border after Brexit, in time for the European Council summit on June 28. The UK government is far from united on the matter, and as we reflect here, a showdown over the matter between various factions in the cabinet is likely to occur before this week is done.

Failure to present something agreeable to EU leaders could mean trade talks are sidelined until the October summit that has always been seen as the final deadline for all agreements to be reached.

The final withdrawal deal, and anything agreed that covers the future relationship, will have to be ratified in all of the parliaments across the EU before the March 2019 Brexit date. This is a process that could take months and underlines the importance of resolving the key issues ahead of October.

“Taken in conjunction with growing reports about business frustrations with a lack of guidance and delaying signing off on transition agreements to October could yield a volatile few months. This leaves us a bit cautious on GBP overall,” Issa writes, in a note to clients.


Improving Outlook for the Euro

As troubles for the Pound rise, fears over Italy’s commitment to the Euro are likely to recede which should help the single currency is recovering from its earlier slump.

While Italy’s government appears to have abandoned plans to push Brussels into developing a Euro exit mechanism and moderated its approach toward the roll-back of fiscal reforms, which helped lift the Euro during mid-week trade, reports of an imminent end to the European Central Bank quantitative easing programme are also now providing the common currency with a tailwind.

The ECB’s chief economist, Peter Praet, said on Wednesday that the bank’s rate setters will debate the winding down of its bond buying programme next week, fuelling hopes of a Eurozone interest rate rise sometime in 2019. 

Until now, markets had been told the ECB would continue buying 30 billion of European bonds per month until “September or beyond” and economists had begun to suspect the bank might continue the programme until year-end due to low inflation and a recent slowing of economic growth.

“With recent ECB developments, the tactical outlook may favor a EUR/GBP topside push; the cross has largely been confined to a tight 0.8700/0.8800 range, but we see some scope for a push towards the 200-day near 0.8840,” Issa concludes.

Issa and the TD Securities team refer to the inverse of the Pound-to-Euro exchange rate and are suggesting the latter could move as low as 1.1320 over the coming weeks as the Brexit votes and meetings unfold and traders refocus their attention on the European Central Bank rather than Italy.

The Pound-to-Euro rate was quoted at 1.1384 at the time of publication.

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