"GBP Pressure to Persist", Macron Comments Likely to Galvanise Opposition to May's Brexit Deal

Macron EU council

French President Macron's threat to push the UK into a never-ending customs union if French demands on fisheries are not met will only galvanise opposition to Theresa May's Brexit deal. Image (C) European Union.

- EU leaders sign off on Brexit deal

- Macron comments make May's job of selling deal harder

- Pound-to-Euro rate @ 1.1296, Pound-to-Dollar rate @ 1.2819

Pound Sterling rose sharply at the start of the new week as markets absorbed weekend news the EU has signed off on the Brexit deal struck reached by UK and European Commission negotiators following months of talks.

Predictably however, the gains were soon faded with the underlying challenges facing the UK currency remaining ultimately unchanged: the deal is unlikely to pass through the UK parliament in its current form and months of uncertainty therefore still lie ahead.

We see little chance of a sustainable recovery until clarity emerges.

"GBP pressure should persist and volatility remain high this week," says Joseph Capurso, a strategist with Commonwealth Bank of Australia. "The next major hurdle is to get the Brexit deal approved by the UK House of Commons, a vote provisionally scheduled for 10 December. However, it still looks like UK Prime Minister Theresa May will struggle to gather a majority to pass the Brexit deal in the UK House of Commons."

Making the deal and even harder sell is French President Emmanuel Macron who - quite extraordinarily - said France will use the threat of keeping the UK in a permanent customs union if the UK did not agree to French demands for their fisherman to maintain access to UK waters.

"We as 27 have a clear position on fair competition, on fish, and on the subject of the EU's regulatory autonomy, and that forms part of our position for the future relationship talks," said Macron following the meeting of EU leaders in Brussels.

The president implied that without sufficient progress on trade, the backstop plan to avoid a hard border in Ireland would have to be implemented, including a temporary customs union for the whole of the UK.

"It is a lever because it is in our mutual interest to have this future relationship. I can't imagine that the desire of Theresa May or her supporters is to remain for the long term in a customs union, but (instead) to define a proper future relationship that resolves this problem," says Macron.

This shows us individual states can simply use the threat of veto to extract out of the UK their individual concessions.

Spain has been keen to pursue further control over Gibraltar and the threat of veto they too wield puts the UK in something of a powerless position in the second round of negotiations.

This if the Brexit deal actually passes through the UK parliament of course.

There are reasons to believe the deal will not pass with Macron's comments likely to only galvanise opposition to the plan.

However, the Prime Minister has sought to downplay Macron's comments as she sold the "best possible deal" available to parliament.

"It's not going to happen," says Theresa May in response to Macron's comments in her address to the House of Commons on the afternoon of November 26.

Furthermore, hopes that remain-leaning parliamentarians might vote for May's deal to avoid a 'hard' Brexit looks increasingly unlikely with hopes that a 'third way' could ultimately emerge whereby the UK stays in the European Union.

However, the route to a so-called 'People's Vote' on remaining in the EU looks to be quite a difficult one at this juncture and to us the extension of Article 50 - effectively putting the withdrawal process on ice - looks to be the most likely outcome.


3% Gain, or 3% Fall

CBA say their working assumption is the House of Commons will nevertheless pass the Brexit bill on 10 December (or whenever the vote is held).  

If the House of Commons passes the Brexit bill, we expect GBP to enjoy a limited rally of around 1 to 3%.  

"But if the House of Commons does not pass the Brexit bill, we expect GBP to slump by at least 3%," says Capurso.

The Pound-to-Euro exchange rate is presently quoted at 1.1295 on the inter-bank market, placing it more-or-less in the middle of its longer-term range and at levels consistent with ongoing Brexit uncertainty.

Those looking to make an international payment should note the rate charged by high-street banks lies in the 1.10-1.1090 region while the rate charged by independent foreign exchange providers is in the 1.1180-1.1215 region.

Those looking to make payments are advised to speak to independent specialists to both secure a competitive rate the delivers substantially more currency while also learning how to protect against a potentially adverse move in Sterling over coming weeks.

The Pound-to-Dollar exchange rate is quoted at 1.2822 on the inter-bank markets with high-street banks offering in the region of 1.2470-1.2563. Independent providers are offering rates in the 1.27-1.2730 bracket.

The Prime Minister will now look to sell her deal to the country, in the process she will argue that the public just want to move forward and scuppering the deal will only invite further uncertainty.

It is hard to say whether the value of the Pound reflects the belief that May will succeed or whether it is actually reflecting the view that she won't succeed and months of uncertainty remain.

Whatever the case, Sterling is looking remarkably stable in the short-term despite the headlines and a couple of analysts we have heard from actually see more familar levels being maintained over coming days. "We suspect that markets are beginning to suffer from headline fatigue suggesting that EURGBP may be confined to the familiar 0.87/0.91 range," says a note from TD Securities.

"GBPUSD should be on hold until the Parliamentary arithmetic becomes clearer which may not be until the first vote. It’s going to be tough for Theresa May to get this through. Even if she does then a fresh election still looks likely in the coming months. UK political uncertainty seems assured which will be keeping a lid on Sterling for the time being," says Neil Wilson, an analyst with Markets.com.