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British Pound Holds Week's Gains vs. Euro and Dollar, Analysis Shows May's Deal has a Decent Shot of Getting Through Parliament

Theresa May still holds the initiative on Brexit

Above: Prime Minister Thersa May still holds the initiative on Brexit. File photo. Image by Jay Allen © Crown Copyright

The British Pound is the best performing major currency of the past week having recorded advances against the likes of the Euro and Dollar on the back of cementing expectations that a 'no deal' Brexit will be avoided on March 29.

Sterling is trading near recent highs ahead of the weekend with markets digesting overnight reports the UK will request an extension to the Brexit date, in order to buy the UK more time to get its house in order.

The European Union expects UK Prime Minister Theresa May to ask for a three-month technical delay to Brexit, two EU officials told Bloomberg.

According to Bloomberg's Ian Wishart, discussions between the EU and UK suggest May will ask for an extension in the event the British Parliament backs the Brexit deal but it isn’t signed off until an EU summit scheduled for late March.

The report therefore suggests an extension is likely, even under a deal being agreed.

"In the UK, EU officials say they expect May to ask for a three-month extension, though the ERG (Brexiteer Tory backbenchers) are threatening to bring down the government if May asks for any extension, by no longer voting for any government legislation. Is that a credible threat? The probability of Labour having the most seats at the next election is at its lowest since we started collecting data, but at 40% is still high enough to make us question whether the ERG will follow through," says Elsa Lignos, foreign exchange strategist with RBC Capital Markets.

For now markets believe May still holds the initiative, and this is being interpreted as a positive for Sterling by currency markets. The Pound-to-Euro exchange rate trades at 1.193, with the week's high lying at 1.1538 and the low at 1.14. The Pound-to-Dollar exchange rate is quoted at 1.13039 with the week's high at 1.3105 and the low down at 1.2891.

Looking at the currency's performance we see it is sitting a the top of the performance league for the past week's trading period:

Pound is the best performer

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The Brexit Deal has a Decent Shot at Getting Through Parliament: Cicero Analysis

The Pound has rallied over recent days amidst a steady flow of news reports suggesting the latest round of negotiations in Brussels should ultimately yield something the Prime Minister can secure a parliamentary majority for.

And new analysis suggests the Prime Minister is in a better position to get her deal passed by parliament than first appears, even with her wafer-thin parliamentary majority.

Analysis by Cicero Group - a financial consultancy - has found that May could afford to lose the support of more than 30 Tory MPs and still get her deal through the Commons.

The analysis - seen by The Times newspaper - looked at the past voting records of MPs on a range of recent Brexit debates.

The findings suggest May will be able to push through a vote by winning over enough of her party, some Labour MPs, and critically, the DUP.

Even if Brexiteers in the European Research Group fail to back May's deal, Cicero find that:

  1.  The Brady amendment which was voted on back in January was backed by seven Labour MPs, Cicero suggest these MPs would almost certainly back an amended deal.
  2. A further seven voted against the Cooper-Boles amendment in favour of extending Article 50, and another 11 abstained.
  3. "This could indicate that there are about 18 Labour MPs who when faced with the alternative of no-deal or an extension of Article 50 could support Mrs May’s deal," says Oliver Wright, political correspondent at the Times who analysed the data.

Including those who already supported the Brady amendment, this means there is potential for about 25 Labour MPs to back the deal.

And, we believe it is a great deal easier for Labour Party MPs to rebel against their official position on Brexit, simply for the fact that the party is reeling under defections (Ian Austin has on Friday announced he is quitting); the leadership are in no position to 'crack the whip' on any MPs that vote for a deal that is seemingly in the national interest in that it 1) delivers on the EU referendum and 2) avoids a damaging 'no deal' Brexit.

"So if the changes to the agreement are enough to secure the support of the DUP and about 25 Labour rebels, then Mrs May needs just over half of the 72 Tory MPs (so 37 or 38) who abstained or voted against the government last Thursday," says Wright. "The arithmetic is more promising than has been suggested."

This news is positive for Sterling as foreign exchange markets views a Brexit deal as a best-case outcome for a currency that has for years been pressured by uncertainty.

A deal will remove a significant amount of that uncertainty, allowing the currency to appreciate as UK businesses begin investing once more.

The focus has turned back to parliamentary arithmetic this week with the defection of three Conservative party lawmakers who blame May's handling of Brexit negotiations for their departure. The loss leaves May with a majority of seven when her Northern Irish partners in the DUP are considered.

According to analysis from BMO Capital markets, the defections from the Conservative Party mean PM May has even less chance now of securing sufficient support for her deal, while creating more scope for it to be rejected for a second time later this month.

"The recent Labour & Conservative splits make us even more uneasy, and a 'no deal' Brexit remains our base case, at subjective odds of 53%," says Stephen Gallo, European head of FX strategy at BMO Capital Markets.

BMO Capital say the Pound will fall 8% should no deal be agreed.

However, we believe Gallo is missing another perspective on the matter: with the government's majority so small, it will only take a few leave-sympathising MPs to abandon the party and joint the rebels in the Independent Group. We know a number of MPs are threatening to walk should the government make 'no deal' official policy, with ex-cabinet member Justine Greening being the latest to threaten such a move.

If the government loses its majority it is unable to govern, and we believe May would ask for a lengthy delay to Brexit in order to allow another General Election.

This would in turn be incredibly dangerous to Brexiteers who would feel the risk of no Brexit happening at all increases under such circumstances.

As such, they could be more likely to vote for May's deal in order to shore up the government, and thus guarantee Brexit in March.

"Uncertainty about Brexit continues to hang over the market and this has limited the upside in Sterling," says analyst Georgette Boele with ABN AMRO in Amsterdam, "no-deal is still unlikely, but the ride could be bumpier."

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