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Pound Sterling eyes Rising no-Brexit Chances Following Parliamentary Manoeuvres

May addressing parliament

Image © Pound Sterling Live

- Pound Sterling trades towards bottom of range midweek

- Parliament increases its powers to thwart a 'no deal' Brexit

- Shock as Service sector heads for contraction according to latest data

Pound Sterling could be protected from significant weakness on fresh steps taken by the UK parliamentarians to prevent a 'no deal' Brexit taking place in March 2019, however we expect the currency to maintain a soft undertone ahead of the key December 11 Brexit vote owing to entrenched uncertainty over the outlook.

Moves by a former Attorney General, and a rebellion by a chunk of Conservative party MPs, means parliament has a greater say in what the government does when it loses the December 11 vote on Theresa May's Brexit deal.

Dominic Grieve, the Conservative MP who served as attorney general for four years, got his amendment passed to let MPs have more of a say on Brexit plans if the prime minister's deal is defeated in parliament next Tuesday.

26 Conservative MPs voted against their government ensuring the amendment went through by 321 votes to 299.

As well as potentially tying the prime minister's hands over the next steps for Brexit, it reduces the chance of the UK leaving the EU without a deal as it confirms there is a majority in the House of Commons that would vote to prevent a 'no deal'.

For the British Pound, this is important as a 'no deal' would likely lead to a disruptive Brexit. The Bank of England's own scenario analysis suggests Sterling could fall by up to 25% in the event of the worst-case disruptive Brexit scenario.

The move also raises the chance of a no-Brexit outcome as there is an assumption the hands of remainers in parliament has been strengthened by the Grieve ammendment.

Economist Malcolm Barr at JP Morgan today tells clients he believes the chance of no-Brexit has risen to 40%, from 20% previously.

"The UK now appears to have the option of revoking unilaterally and taking a period of time of its own choosing to decide what happens next," J.P. Morgan economist Malcolm Barr writes in a note to clients.

He places a 10% probability on a no deal Brexit, down from 20%, and a 50% probability on an orderly Brexit, down from 60%.

While the shift in odds should have come as a relief for Sterling, the currency is actually still seen trading familiar territory.

We are not surprised by the currency's inability to get a notable boost from the news as there remain chronic levels of uncertainty as to which way the country is headed.

No one grouping in the UK parliament hold the majority required to see their vision of Brexit pass while the government has no intention of deviating from their course at this stage.

For currency markets, a wait-and-see pose might well be adopted.

Indeed, while there appears to be a majority in the Commons for preventing a 'no deal' happening, Grieve himself says his amendment "does not mean a no-deal Brexit is off the table".

The Pound-to-Euro exchange rate is quoted at levels consistent with expectations for uncertainty to persist: 1 GBP buys 1.1206 EUR on the interbank markets at the time of writing, ensuring it trades near the multi-month low at 1.1180 achieved Tuesday.

High-street banks are offering exchange rates of between 1.0910 and 1.10 for international payments and transfers while independent providers are seen to be quoting in the 1.11-1.1130 region.

The Pound-to-Dollar exchange rate is quoted at 1.2692 on the interbank markets, the pair is looking heavy and intent on testing the 2018 low at 1.2626 soon.

High-street banks are offering exchange rates of between 1.2350 and 1.2439 on international payments while independent providers are offering in the region of between 1.2580 and 1.26.

What happens after May's government lose the Brexit vote on December 11 is highly uncertain with a number of possibilities on the table.

“The Pound is on the ropes and looks set for more falls as it seems all but certain Theresa May's government will fall. A vote of no confidence and fresh general election now seem certainties after a humiliating day in parliament. The spectre of a no deal crash out looms, but equally there is building momentum behind a second referendum," says Neil Wilson, Chief Market Analyst with Markets.com.

We do believe however that the most likely outcome would be a second vote being put on the table; we imagine the government might try and get some further movement from the Europe Union on the deal (political decleration could be negotiated further, the Withdrawal Agreement is however closed to negotiation).

The bill could stand a good shot of passing on its second showing, particularly if the 'Brexiteer' camp realises their preferred 'no deal' plan stands little chance of carrying a majority and the entire Brexit project is in jeopardy of failure if they don't support the government.

"In short this looks like a lot of short term trouble for GBP with a high risk of long term damage (no deal exit), but with rising possibility of long term salvation from a second referendum, which Remain would carry. Worse before it gets better is the mantra for sterling," says Wilson.

 

Shock as UK Economy Slows Down Sharply Ahead of Year-End

The IHS Markit Service PMI for November has been released mid-morning and read at 50.4; a few ticks away from the 50 figure that marks the watershed between expansion and contraction.

Markets had expected a more optimistic reading of 52.5, the result is made all the more surprising given that the Manufacturing and Construction sectors both gave positive upside surprises earlier in the week.

According to IHS Markit, both business activity and incoming new work expanded at the weakest rates for almost two-and-a-half years.

services sector

The data bodes ill for the UK economy heading into year-end as the services sector accounts for over 80% of UK economic activity.

Reports from survey respondents suggested that subdued business and consumer spending had held back growth in November. A number of firms reported to IHS Markit that heightened Brexit uncertainty had led to delays with clients' business investment decisions.

There is also a potentially worrying knock-on effect for UK employment dynamics contained in the report. Softer demand growth and rising staff salaries contributed to more cautious hiring policies in November. The latest upturn in employment numbers was only modest and the weakest recorded for four months.

“With the lowest optimism about the future since July 2016 and minimal job hiring, the main driver of the UK economy looks like it’s grinding to a halt as it teeters too close to the no change mark for comfort. Respondents have provided plenty of evidence that the prime cause of this slowdown must be firmly placed on the shoulders of Brexit indecision,” says Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, who sponsor the report.

Meanwhile, service providers' optimism regarding the year-ahead outlook for business activity moderated again in November.

There was little notable impact on the value of Sterling, which is understandable as markets remain almost exclusively focussed on the wrangling over Brexit in the UK parliament.

If anything, bad data could be good for the Pound if it galvanises parliament into voting for Prime Minister May's Brexit deal.

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