Above: DUP leader Arlene Foster. Image © DUP, Reproduced Under CC Licensing
- Sterling strength overturned as clock counts down to Brexit vote
- Pressure grows as DUP won't back Brexit deal
- Cox legal verdict comes as a blow to May
A tumultuous day for Pound Sterling entered its afternoon session with the currency attempting to claw itself off the floor, only to be flattened by the another shot of bad news.
With the clock counting down to tonight's parliamentary vote on the EU-UK Brexit deal, Northern Ireland's DUP party have said that in their view not enough progress has been achieved in negotiations to ensure the UK is not bound indefinitely by the Irish backstop clause, were it to ever be triggered.
The BBC's Political Editor Laura Kuenssberg says she is told the DUP will "definitely be voting against" the deal, and not merely abstaining.
"GBP drops about half a cent on confirmation that the DUP is not persuaded that anything has changed and it will reject the Withdrawal Agreement. A DUP official was one of the lawyers that advised ERG," says Marc Chandler, an analyst at Bannockburn Global Forex.
We have long argued the DUP are central to any attempt by the government to get its Brexit deal passed, believing that the DUP's judgment on the Irish border would provide guidance to opponents of the deal from other parties.
We believe opposition to the vote will be narrower than that witnessed in January, but there is little indication that the sea-change required to get the deal passed is forthcoming.
The British Pound took a sharp fall mid-morning after UK Attorney General Geoffrey Cox published his legal advice on the assurances Prime Minister Theresa May brought back from Strasbourg last night.
Cox says the "legal risk remains unchanged" of the UK being stuck in the backstop. In short, nothing has been achieved in EU-UK Brexit negotiations in recent weeks from a legal perspective. Sterling had rallied overnight amidst market speculation that May's visit to Strasbourg had clenched a last-ditch concession from the EU that would convince MPs to vote for her deal.
Above: Geoffrey Cox, the Attorney General. File Photo. Image © Pound Sterling Live, Parliament TV
The assessment from the Attorney General will therefore come as a blow to May as it makes it is now incredibly hard for opponents of her deal to switch and now support it. Cox says the UK can still become trapped in the backstop, however he says the assurances given last night "reduce the risk" of that happening.
While this will allow some opponents to back May's deal, foreign exchange markets recognise not enough has been done to ensure the uncertainty of recent years is put to bed by a deal, and have sold the Pound as a result.
"The AG's decision has put GBP back into political limbo this week with renewed focus on the downside," says Mazen Issa, Senior FX Strategist with TD Securities. "As evidenced by the AG's ruling, GBP is an immediate sell as the currency is likely to enter another period of political limbo following the 'meaningless vote'".
The Pound-to-Euro exchange rate is down 1.61%, at 1.1575, it had been as high as 1.1792 overnight but in a remarkable turn in fortunes is now inclined to test the week's lows at 1.1524 once more.
The Pound-to-Dollar exchange rate is trading at 1.3017 having been as high as 1.3284, the week's low is at 1.2960.
"Should the GBP-bullish domino effect fail to develop – either through Cox’s legal advice not ruling out the possibility of the UK staying trapped within the customs union or the DUP remaining in opposition to PM May’s deal – then GBP will fall back," says Hans Redeker, a foreign exchange strategist with Morgan Stanley.
The End of the May Premiership?
With May's Brexit deal likely to be defeated tonight, and no prospect of any further concessions likely from the EU, the obvious question becomes what next?
To us it looks increasingly likely that the Prime Minister will have to resign, and in doing so trigger the process of electing another parliament. After all, it's not necessarily May who has failed, rather it is the House that has failed to unite behind the type of Brexit it wants.
"There is now no way through for the PM in tonight’s vote. DUP has abandoned her. Whole strategy has failed," says Vicki Young, Chief Political Correspondent at the BBC who adds a minister has told her the “wheels have come off”.
If May cannot reasonably be expected to unite parliament behind a deal, a second referendum or another general election become the two alternative options that would clear a path forward.
But, a second referendum is highly problematic in that 1) it tells the electorate a vote doesn't actually matter as it might never be acted on and 2) if leave win again, we are back to the question of what kind of leave has been voted for.
But, assuming the two parties present a clear manifesto on Brexit, a General Election allows the public to pick their desired course forward. We know Labour favour a customs union, or softer Brexit, but we don't know who the next potential Conservative leader will be. However, selecting that leader will entail selecting their vision for Brexit and will ensure the public are voting on a vision for Brexit. This gives the new leader a mandate more tangible than that enjoyed by the current Prime Minister.
While a change in leadership this might benefit Sterling in the long-run, we would expect the currency to come under pressure in the medium-term as the uncertainty posed by a new General Election is brought to bear.
“Although markets may be relieved if the House of Commons vote to extend the withdrawal period in the case of a government defeat tonight, a snap election and the uncertainty of the outcome will create more turbulence and is likely to weaken the GBP. Therefore, expect increased turbulence in financial markets in coming days and weeks if the government is defeated tonight," says Richard Falkenhäll, senior FX strategist at SEB.
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Sterling Back to Where it Was a Day Prior, Should Benefit from 'Safety Net'
Despite a volatile day, Sterling is actually more-or-less back to where it was a day prior.
Pound Sterling rallied to record a fresh 22-month best against the Euro overnight, with 1 GBP buying as much as 1.1792 in the wake of news that the EU and UK had agreed fresh changes to the Brexit deal that might allow it to successfully pass through parliament on Tuesday night.
Changes to the Brexit deal were focussed primarily on ensuring the UK can never be tied in the EU's orbit indefinitely by the Irish backstop clause. Markets welcomed news of last-minute progress between the two sides, sending Sterling higher across the board and in the process cementing the currency's position as 2019's best performer.
Sterling has strengthened over recent weeks on signs that a 'no deal' Brexit has become increasingly remote, and we continue to believe the best-case scenario for the currency would be for the Brexit deal to be passed as it provides certainty and stability for the next two years and provides the basis for an enduring future trading relationship between the UK and EU.
A 'no deal' Brexit still remains remote in our view, therefore while further gains are becoming increasingly unlikely, a major slump in the currency is a remote prospect.
"Geoffrey Cox says PM May's new legally binding text doesn't change legal risk on backstop. Probably safe to say game over for GBP climbing above 1.33 on deal getting through Parliament today. Buy-the-dip mentality to prevail - scenario of 2nd referendum is growing in likelihood," says Viraj Patel, a foreign exchange strategist with Arkera.
Morgan Stanley's Redeker also says the the Pound "remains a buy on the dip."
Morgan Stanley argue that even if May's deal fails to pass parliament, the damage to Sterling should be relatively shallow, simply for the fact that its failure only opens the door to a softer Brexit.
"Should PM May’s deal fail, then Labour MP Cooper suggested there could be an amendment allowing Parliament to take control of Brexit, which could be voted on as soon as tomorrow, opening the door for a customs union/'Norway' model type of outcome," says Redeker.