Prime Minister Theresa May is likely to win over either the Brexiteer or Remain faction in parliament to see her deal pass, this outcome will boost Pound Sterling we are told. Image © Number 10 Downing Street.
- Reports suggest 40-80 Labour MPs could support amended Brexit deal
- Currency traders to maintain wait-and-see approach re. Sterling short-term
- But, Pound Sterling looking cheap if you believe Brexit deal will pass says one strategist
- Pound-to-Euro exchange rate @ 1.1046, Pound-to-Dollar rate @ 1.2739
A report out today states that a good portion of Labour MPs will ultimately vote with the government to avoid a no deal brexit, but concessions must be made. While the news has not boosted Sterling it does suggest a big move higher could ultimately materialise.
Pound Sterling is seen trading towards the bottom of its December-January range against the Euro with 1 GBP buying 1.1065 EUR; if Sterling closes today lower than where it opened then it would have suffered four consecutive days of falls against the single-currency. We are expecting declines to ease around the 1.10 support level as has been the case in the past.
"For many of those trading GBP/EUR 1.1000 is the base of their range," says Jeremy Boulton, an analyst on the Thomson Reuters trading desk. "1.1000 is 0.9091 EUR/GBP, and a wealth of non-speculative GBP demand is assured nearby."
The weakness in Sterling comes amidst ongoing market nerves ahead of the key Brexit deal vote scheduled for January 15.
However, a bout of broad-based U.S. Dollar weakness means the Pound-to-Dollar exchange rate has traded with a more resilient tenor: The exchange rate is quoted at 1.2790, having risen the day prior. It must be stressed that gains in GBP/USD are more a function of Dollar weakness than Sterling strength.
We expect the wait-and-see approach adopted by currency trades towards Sterling to persist until the outcome of the vote is known and therefore are not expecting any major moves until next week. The scale of the defeat suffered by the deal in the first vote is key: if the scale of the defeat is marginal then markets could bid Sterling higher on the assumption it will cross the line in the event of some fresh concessions being offered by the EU.
However, a sizeable defeat (100+ MPs) would suggest the EU are unlikely to offer anything substantive and a big directional shift in Brexit strategy is required by the government. However, if we look at how the process might unfold following a defeat for the government on January 15, we can begin to see that the Brexit deal is by no means dead. And for Sterling, the success or failure of the Brexit deal is critical.
Labour MPs Would Vote with Government to Avoid a 'No Deal'
The current trajectory is for the UK to exit the EU on World Trade Organsization terms on March 29 should the Brexit deal be rejected by parliament. However, this assumption assumes the government won't be able to win over either of the Brexiteer or Remainer cabals in parliament.
Winning over the Brexiteer side of the argument can be done if the EU offers some legal assurances that the Northern Ireland backstop mechanism - seen as a trap to keep the UK tied to EU rules by Brexiteers - will be temporary.
However, some Conservative MPs have indicated they will reject the Brexit deal even if such concessions are forthcoming.
If Prime Minister Theresa May can't win over Brexiteers, she can work on Labour MPs to form a cross-party consensus.
This would mean swinging to a 'soft' Brexit.
According to Francis Elliott, Political Editor at the Times, May is negotiating with small groups of Labour MPs and is understood to have seen Gareth Snell, Lisa Nandy, Jon Cruddas, Caroline Flint and John Mann.
"MPs from Leave-voting seats told her they wanted to vote for the deal if she could make it more politically palatable. Mrs May told them that she could not support a full customs union but wanted frictionless trade," says Elliot.
What is striking is that Elliot reports it is not impossible that Jeremy Corbyn could give tacit support for backing a modified deal in order to avoid a no-deal exit and a second referendum, neither of which the Labour leader wants.
"The Labour MPs claimed that 40 to 80 of their colleagues could eventually follow suit, after several rounds of voting," says Elliot. Elliot cautions this view has been rejected by other senior party figures.
Nevertheless, that 40 to 80 Labour MPs could vote with the government on avoiding a 'no deal' Brexit is significant in that it should allow the Brexit deal to ultimately sail through.
Analyst Viraj Patel, FX & Global Macro Strategist at Arkera says recent developments, "may have arguably reduced risks of disorderly GBP decline".
Over the past 24 hours the government has lost two key votes on legislation pertaining to Brexit, something that commentators say points to the strength of the faction in parliament that seeks to avoid a 'no deal' outcome.
As such, Sterling "looks pretty cheap" says Patel.
Foreign exchange strategist Jordan Rochester with Nomura in London says he is a buyer of Sterling, arguing the UK parliament will ultimately ensure the UK avoids a 'no deal' Brexit.
On such an outcome, Rochester fancies the British Pound's chances against the Euro in particular.
"Over the next few weeks parliament is likely to attempt to find a majority in favour or against Theresa May’s deal. Rather than increasing the likelihood of a 'no deal' outcome, we expect either the deal to scrape through, owing to last minute concessions to the key Brexit groups, or if parliament forces the government to adopt a different or more market positive Brexit stance," says Rochester.
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