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British Pound Today: EU Gun for 2nd Referendum, GBP Softer vs. Euro and Dollar Ahead of the Weekend

 

Tusk and Barnier

Above: The very real threat of a long Brexit delay being made by the EU are working in favour of Prime Minister May's Brexit deal. Pictured, chief EU Brexit negotiator Michel Barnier and European Council President Donald Tusk. Image © European Council.

Pound Sterling is seen coming off its weekly highs ahead of the weekend with foreign exchange traders cutting back exposure ahead of what promises to be another potentially explosive week in UK politics.

The European Union are said to be readying to tell UK Prime Minister Theresa May that she must hold a second EU referendum, or soften Brexit, in return for them granting a lengthy delay to Britain’s departure date.

Bruno Waterfield at The Times says he understands May has been told by senior EU officials and other European leaders that conditions for a Brexit delay would include the option of a second EU referendum. According to Waterfield, the EU will insist that any extension must be used to decide between the options of a second referendum, cancelling Brexit or dropping the government’s red lines on exiting the single market and customs union.

The news comes in the wake of Thursday's vote in the House of Commons to delay Brexit. An initial delay to June 30 is granted on the basis that a deal is passed before March 29, but a greater extension must be sought under circumstances under which no deal is reached.

Expectations for such a delay have been building over recent weeks, allowing the British Pound to rally to fresh highs against the Euro and back towards the top of longer-term ranges against the U.S. Dollar. The Pound-to-Euro exchange rate recorded a new 22-month high at 1.18, but is down to 1.1709 at the time of writing. The Pound-to-Dollar exchange rate recorded a high at 1.3378, but is back down at 1.3250 ahead of the weekend.

To us it appears the EU are seeking to heap pressure on Brexiteer opponents of the EU-UK Brexit deal, which was this week rejected for a second time. We understand that Brexiteers, faced with a lengthy delay, are seeking to find ways to allow them to about-turn and back the deal. Reports suggest MPs in the European Research Group - a group of Conservative Party MPs dedicated to a 'pure' Brexit - are exploring various avenues that would allow them to shift into supporting May's deal. Further reports suggest Northern Ireland's DUP continue to engage the government in order to establish a route forward that would allow them to back the deal.

In totality, these developments are positive for Sterling as we believe the ratification of the EU-UK Brexit deal will see further gains as uncertainty over Brexit is finally cleared.

"We remain of the view that the Pound is due for a 'deal dividend' once the UK moves into the lengthy transition period on its way out of the EU," says George Cole, an analyst with Goldman Sachs.

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May is expected to ask EU leaders at next week's European Council summit for a delay to Brexit.

A French official on Friday told the Reuters news agency the UK would only be granted an extension to the article 50 Brexit negotiation period if its parliament passed the current deal on the table or if a clear, alternative plan emerged by next week's EU summit,.

"Without clarity - an adoption of the Withdrawal Agreement or a clear alternative - a no-deal would prevail," the official at President Emmanuel Macron's office said.

Alternatives would include a second referendum on Britain's divorce from the European Union, a new election, or a change of plan acceptable to both sides such as arrangements already agreed by countries like Canada or Norway, added the official.

"For GBP, an extension increases the likelihood that the Brexit process moves towards even softer outcomes (including a customs union, single market membership, or a second referendum)," says Cole. Goldman Sachs models suggest GBP/EUR "still embeds a Brexit-related risk premium," says Cole and "on a more benign end-state" the GBP/EUR exchange rate could move" to the upper 1.20s.

We have heard through the course of the past 24 hours that European leaders are likely to seriously consider a request for a longer delay to Brexit, with a number of senior figures suggesting any delay would be a long one. Such an outcome would be frustrating for those wanting Brexit, but from a currency perspective, a long delay is seen as a positive for the Pound.

European Council President Donald Tusk on Thursday said he will consult EU leaders ahead of the European Council summit taking place on March 21-22 and appeal for them to be open to a long extension if the UK finds it necessary to rethink its Brexit strategy and build consensus around it.

Ireland's Tánaiste and Minister for Foreign Affairs Simon Coveney said a Brexit extension of 21 months is a possibility.

He said a long extension would give the UK a "long reflection period" about the kind of Brexit it wants and may facilitate a fundamental rethink, or it may not.

Speaking on RTÉ's Today, Coveney said a "crash-out" could happen by accident even if most people do not want it, but he thinks the UK will get an extension as long as there is a plan to go along with that.

Expectations that a third vote on the EU-UK Brexit will take place next week continue to grow, with Prime Minister Theresa May's spokesperson saying the Prime Minister "will work tirelessly to get a Brexit deal."

"She's been working tirelessly to deliver a deal and she will continue to do that," the spokesperson says, adding she was unaware of any updated government legal advice on Brexit, following a report by the Telegraph newspaper which said that May's top lawyer had attempted to win over Brexit-supporting lawmakers with additional advice.

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