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Pound Sterling 48 Hour Outlook: Key Events that will Guide Price action Against the Euro and Dollar

Pound outlook

Above: Prime Minister May intends to meet each of the EU's 27 leaders over coming days and weeks. File photo, © Number 10 Downing Street

- Attorney General Cox to deliver key briefing

- May to embark on diplomatic blitz with EU leaders

- Labour Party resignations play positive for Sterling says one analyst

- Pound-to-Euro exchange rate @ 1.1417

- Pound-to-Dollar exchange rate @ 1.2933

Pound Sterling trades marginally higher against its major competitors at the start of what promises to be another week loaded with political triggers for the currency.

Sterling is back above 1.14 against the Euro and 1.29 against the Dollar with weekend reports that France's Emmanuel Macron indicating that the legal guarantees being sought by Prime Minister Theresa May in order to get the Brexit deal ratified in parliament are possible.

Reports suggest French President Emmanuel Macron "and other European countries are ready to give Britain legally binding assurances that the Irish backstop is temporary".

"President Macron of France has softened his line in recent weeks to aid a last-ditch attempt by the EU to help get the withdrawal agreement across the line next month," says Bruno Waterfield, Brussels Editor at The Times.

"Macron to the Pound’s rescue," says Viraj Patel, foreign exchange strategist with Arkera. "We’re in the pessimistic-neutral state, so news like this will on the margin lift Sterling."

UK Prime Minister Theresa May is currently engaged in negotiations with the EU to win changes to the Irish backstop mechanism: that piece of the Brexit Withdrawal Agreement that could ultimately see the UK locked into the EU's single market and customs if ever triggered.

May is being tipped to commence a blitz of meetings this week that would see the Prime Minister meet with every one of her European counterparts over coming weeks in order to try and secure the necessary changes to the backstop that would allow her to sell her deal to a sceptical legislature back home.

"Prime Minister Theresa May is setting off to Europe to “re-negotiate”. What a sad Sisyphean task!" opines Ulrich Leuchtmann, an analyst at Commerzbank. "I cannot imagine that anyone assumes this might result in anything productive."

Leuchtmann says the markets have become more relaxed on the prospects of a disruptive Brexit taking place on March 29, but he believes such signs "despite the grim news... hardly seems justified".

"Any day where nothing happens increases the likelihood of a no-deal scenario," says Leuchtmann.

 

Attorney General Cox to Offer Key Legal Perspective to Backstop Changes

With foreign exchange markets fixed on political developments in the UK we would flag to readers UK Attorney General Geoffrey Cox will speak with Brexit negotiators in Brussels on Monday.

He will then address parliament on Tuesday, markets will look for credible signs of progress from Cox, noting him to be an influential figure amongst Conservative MPs.

MPs are concerned about the backstop, a view reinforced by the Brexiteer attorney general himself last November.

"However, if he can show that his concerns have diminished after the latest talks with the European Union and especially if those talks allow him to update his legal advice, then perhaps more MPs can be brought to accept the backstop," notes analysis from the Reuters newswire on the matter.

The Reuters currency desk believe there could be some volatility in Sterling around news pertaining to Cox.

The prime minister's effective deputy, David Lidington has meanwhile said obtaining legal changes to Britain's deal to leave the European Union will be difficult but recent trips by British ministers to Brussels have been productive.

"My experience last week... was that they were a lot more than courtesy calls. It was a very useful discussion about the politics, both within the United Kingdom and within the EU27, and a scoping out of what was possible," Lidington, who serves as Cabinet Office minister and was in Brussels last week, told BBC radio. "Reopening the withdrawal agreement will be very difficult."

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Hard Brexit Just Got Softer

The concern for markets is that a 'no deal' Brexit will be highly disruptive for the economy.

Therefore, signs that plans are in place to mitigate the impact of such an outcome would go some way in limiting the negatives.

With this in mind, of note on Monday is news that Europe's financial markets regulator has granted approval to UK-based derivatives clearing houses to continue serving EU clients if there's a no-deal Brexit, a major boost to London's battle to remain the central market for euro clearing.

The European Securities and Markets Authority said the decision to allow LCH Limited, ICE Clear Europe and LME Clear to continue operating was to limit disruption and avoid potentially negative impacts on financial market stability.

 

What Does the Labour Party Split Mean for the Pound?

In short, it could be a positive for the currency

"Sterling may gain support from reports that a group of Labour MPs will announce on Monday they are leaving the party," says Robert Howard, an analyst on the currency desk at Thomson Reuters.

Seven MPs have resigned from the Labour Party in protest at Labour Leader Jeremy Corbyn's approach to Brexit and anti-Semitism.

They are: Chuka Umunna, Luciana Berger, Chris Leslie, Angela Smith, Mike Gapes, Gavin Shuker and Ann Coffey.

Berger said Labour had become institutionally anti-Semitic and she was "embarrassed and ashamed" to stay.

According to Howard, the resignations could make it harder for him to become prime minister after the next general election.

"The received wisdom is that GBP will tank if Corbyn is the next PM, because of Labour's high-spending policies, so anything that lessens that risk should be good for GBP. The next election is provisionally scheduled for 2022, but Brexit developments may lead to its being held much earlier," says Howard.

Ladbrokes has shortened the odds of the next election will be held in May or June this year to 5/1 and 8/1 respectively, from 8/1 and 10/1 a fortnight ago.

William Hill quotes 11/4 for a Labour majority after the next election – longer odds than the 2/1 it quotes for a Conservative majority.

A hung parliament is its 10/11 odds-on.

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