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British Pound Today: Cross-Party Talks on Life Support, Sterling Looks to Claw Back Lost Ground vs. Euro and U.S. Dollar

https://www.poundsterlinglive.com/images/stock/brexit-euro-flag-covering-british-flag.jpgBrexit negotiations and the Pound

Image © David Holt, Accessed: Flikr, Licensing Conditions: Creative Commons

- Reports suggest May willing to renegotiate Brexit deal's political declaration

- Hammond latest to suggest cross-party talks should be terminated

- Summer of discontent looks for Sterling

The Pound will this week be looking to recapture some of those notable losses suffered last week and those wanting a stronger currency will be hoping cross-party Brexit talks deliver the progress required to trigger such a recovery.

Short-term momentum is pitted against the Pound which remains highly sensitive to political headlines: the currency suffered five days of successive losses against the Euro while suffering losses in four out of five days against the Dollar as it became clear hopes for a breakthrough in cross-party Brexit talks were growing increasingly unlikely.

The Pound-to-Euro exchange rate is currently quoted at 1.1585, the Pound-to-Dollar exchange rate is currently quoted at 1.3014.

Cross-party talks are set to resume on Monday, while on Tuesday labour market data should put the economy back in the driving seat for the currency, if only temporarily.

The Pound, after all, remains a political currency at present and here news flow is hardly supportive of further gains.

One of Prime Minister Theresa May's leading supporters, the Chancellor Phillip May, will apparently this week join colleagues in the cabinet in calling for cross-party talks to be terminated.

According to The Times, Hammond told colleagues that, while "amiable", they are being held on the "false premise" that a politically acceptable deal could ever be struck.

The intervention by one of May's most significant allies on the matter will only likely pile the pressure on the Prime Minister to turn away from cross-party talks.

The chasm between the Conservatives and Labour is wide and unlikely to be bridged simply because of the scale of the chasms within both parties. It has emerged over the weekend that it is highly likely Labour would only back a deal that made provisions for a 'confirmatory vote'. This is a second EU referendum in all but name. In an interview with the Guardian this weekend, Sir Keir Starmer, Labour's lead negotiator, says another referendum must be part of any package agreed with the government.

While many pro-Brexit Labour MP's will balk at this, it is certainly something the vast bulk of Conservatives simply will not agree to, therefore the death of cross-party talks is something that is highly likely over coming days if the request for a second vote is pushed by Labour.

Gavin Williamson, the former defence secretary, who had backed the talks while in the cabinet, said over the weekend that the crossparty initiative was a “grave mistake” that would have “fatal” consequences for the Conservatives.

“Even if Labour do a deal, break bread with the prime minister and announce that both parties have reached an agreement, it can only ever end in tears,” he wrote in The Mail on Sunday. “Jeremy Corbyn will do all he can to divide, disrupt and frustrate the Conservatives in the hope of bringing down the government.”

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Talks with the EU Could be Reopened

That said, Prime Minister May appears to remain in tenacious form with Bloomberg reporting she will seek to reopen Brexit negotiations with the EU to secure changes to the political declaration.

This would allow for a deal to be struck with Labour back at home.

Apparently the negotiations with the EU would be allow for some kind of customs union, as demanded by the Labour side.

The EU have shown themselves unwilling to renegotiate the Withdrawal Agreement, but the political declaration that will guide further talks is something they have indicated they are willing to consider if it results in a close trading relationship.

This tells us that if May gets her way: 1) Cross-party talks could in fact be dragged on for weeks, in which case Sterling will grind along well-worn ranges against the Euro and Dollar and 2) cross-party talks might have a greater chance of succeeding than we currently gauge, and any breakthrough would be unexpected which could result in a sharp rally in the Pound.

"There remains some chance of a near-term breakthrough—likely centering on a customs union compromise—that could send Sterling higher," says Zach Pandl, a foreign exchange strategist with Goldman Sachs.

But, even if a deal is brokered between the two parties, the size of the rebellion amongst mutineers on both sides of the House of Commons would likely be so sizeable that the deal would still fail.

This should keep any gains by the Pound modest.

"Even if we get to a point where Jeremy Corbyn agrees a deal with the Prime Minister, when it comes to detailed scrutiny of the votes, Labour will revert to form. It will be an almost unprecedented challenge to guide the necessary legislation through the House of Commons. Even if it passes the first few votes, it will fail later," says Willamson who once held the position of the Government's Chief Whip in parliament and therefore knows more than most how difficult it will be to pass any legislation agreed by cross-party negotiators.

Should talks fail, it is widely expected that the Government will opt to hold a series of indicative votes in parliament to find a way through the impasse with the hope that parliament can finally settle on a Brexit plan.

"Without tangible signs of progress or the start of a broader parliamentary process, the risk is that the UK’s exit date slips further—possibly deep into this year or even, eventually, beyond," says Pandl.

We are sceptical that any stable agreement can be reached by a deeply divided parliament: we have seen time and again over recent months there is a chronic inability for parliament to agree on anything decisive.

They are good at agreeing on what they don't want, but the various factions appear incapable of uniting behind a route forward.

Indicative votes would therefore amount to little more than an exercise to buy the Government and Prime Minister Theresa May time.

 

Sterling's Tough Summer 

We believe the Prime Minister will ultimately announce her resignation and a new leader will be elected by the Conservative Party before October; a new leader who is almost certainly inclined to opt for a 'Brexit at all costs' come October 31.

Markets, we believe, are far too relaxed about this outcome, and therefore we believe the downside risks to Sterling over the summer months are high.

The Pound has actually found the economy's robust performance over recent months to be something of a 'saving grace' - the economy is growing jobs and seeing wage increases consistent with higher interest rates at the Bank of England over coming months.

Higher interest rates tend to lead to stronger currencies, therefore the economy is offering some downside support and we find the worst-case scenario forecasts for the Pound in the analyst community have been steadily been revised higher over recent months.

Even in the event of a 'no deal' Brexit taking place in 2019, the prospect of a the kind of sharp, destabilising declines witnessed during the EU referendum of 2016 are unlikely to be repeated.

That is not to say volatility will not be elevated; we expect volatility to increase sharply in the event of a change in Prime Minister and a shift in direction in Brexit.

This will provide those wanting to transfer out of Sterling and into another currency with both opportunities and risks.

"We maintain a mildly constructive view on GBP vs EUR on better cyclical performance and the (admittedly diminished) odds of a deal sometime this month. We will revisit our structural view on the Pound should the domestic political backdrop change significantly (e.g. if Theresa May steps down)," says Goldman Sachs' Pandl.

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