Pound up on May's Turn to Corbyn for a Brexit Solution

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Above: Prime Minister Theresa May says she will engage opposition parties to find a Brexit deal that will pass through parliament. Image (C) Pound Sterling Live.

The British Pound was seen trading higher against its peers on Wednesday, April 03 after Prime Minister Theresa May offered to engage in cross-party talks to find consensus on a Brexit deal that could command a majority in the House of Commons.

By engaging opposition parties, markets believe 1) a Brexit deal might finally be approved and 2) the type of Brexit will be a 'softer' one; both outcomes that lend themselves to a stronger Pound.

However, we caution that May's decision is deeply unpopular with a swathe of her Conservative party and might in fact merely hasten another General Election.

Speaking in Downing Street late on Tuesday, the Prime Minister says she will ask the EU for a second extension to delay Brexit, but that it must be as short as possible.

The initial reaction from business bodies was a positive one.

“Welcome steps must be breakthrough not false dawn. Business confidence slumping, growth stalled and UK reputation in tatters. Tories must compromise on red lines and Labour come to table in good faith. No excuses, no time wasting, no party politics. Enough is enough,”  says Carolyn Fairbairn, CBI Director-General.

Currency markets meanwhile bid Sterling higher in response, with the currency overturning the losses suffered nearly 24 hours prior after parliamentarians failed to compromise and deliver alternatives to Prime Minister May's Brexit deal.

The announcement by May came following a marathon meeting of May's cabinet of senior government ministers that lasted over seven hours. The proposed talks with Labour leader Jeremy Corbyn and other opposition parties are aimed to agree a way forward - or agree a set of options.

Responding to the overture from May, Corbyn says:

"We will meet the Prime Minister. We recognise that she has made a move, I recognise my responsibility to represent the people that supported Labour in the last election and the people who didn't support Labour but nevertheless want certainty and security for their own future and that's the basis on which we will meet her and we will have those discussions."

The basis of the talks will be the existing Withdrawal Agreement reached with the EU, this forms the cornerstone of May's existing Brexit deal and is a document that the EU have repeatedly refused to renegotiate and have insisted will must be ratified by the UK for any type of future trading partnership to be agreed.

Furthermore, May says the government "will abide" by what's agreed by Parliament suggesting that a cross-party consensus for a 'softer' Brexit is highly likely as the Labour Party favours a customs union agreement with the EU.

The Pound has risen on what looks to be a decisive shift towards a 'softer' Brexit.

Pound to Euro exchange rate

Above: Sterling recovers the losses suffered against the Euro nearly 24 hours earlier on news a cross-party Brexit will be sought to break the Brexit log-jam.

"The Brexit rollercoaster continues. Sterling recovers from early losses as PM May offers a cross-party approach to the Brexit deal in attempt to break the political deadlock," says Kyle Uerata, an analyst with ANZ's investment banking division.

The Pound-to-Euro exchange rate is quoted at 1.1710 in mid-week trade, having been as low as 1.1616 a day earlier.

The Pound-to-Dollar exchange rate is quoted at 1.3141, having been as low as 1.3012 earlier in the day.

"Theresa May is changing tack," says Sam Coates at the Times. "It appears she is abandoning the plan to pass her brexit deal on Tory / DUP votes. And gambling there aren't formal mechanisms to stop her."

Responding to the events, European Council President Donald Tusk says, "even if, after today, we don’t know what the end result will be, let us be patient," which suggests to us the EU will be willing to offer another Brexit extension.

"Despite the clearly fractious state of the House, the appetite among centrist MPs appears to be growing for compromise and it seems to be a matter of discovering what type of softer Brexit would appeal to most members. This I feel, will reveal itself soon (at least one hopes) as the hardliners appear to be becoming more isolated. So far the market appears to concur as GBP is holding up relatively well," says a client note from the spot currency trading desk at UBS.

May had been locked in a a seven-hour long meeting with her Cabinet, and we are yet to see the political implications of the decision and we would not be surprised to see some resignations take place.

The decision to engage opposition parties suggests May knows she will simply not be able to get the DUP and hardline Brexiteers in her Conservative party to back her current deal. While the swivel might be good for the Brexit deal, it does present a moment of danger for May and her Conservative party.

We warn that if May does get a Brexit deal across the line with the support of the opposition we could see a number of resignations from the Conservative party while the government's DUP partners have in the past warned they would abandon their 'confidence and supply' agreement with the government if the deal was passed without their support.

Note, that because the Withdrawal Agreement will form the basis of any cross-party Brexit according to May, the Northern Irish backstop agreement stays in place. Therefore the DUP, who are opposed to the deal on the basis that the backstop potentially creates divisions between Northern Ireland and the rest of the UK, would likely have to follow through on their word.

If the government is unable to govern owing to a lost majority, it would be a matter of time before the government had to fold and call a General Election.

This would likely be negative for Sterling which dislikes political uncertainty and the prospect of a Corbyn government.

"We turned Negative GBP recently due to markets not pricing the risk of a Corbyn government adequately in our view," says Thanos Papasavvas, Founder & CIO of ABP Invest. "The population is getting fed up with the Tories' constant internal crises and their inability to form policy. Uncertainty to continue!"

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