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Pound Sterling Live: News of May's 'New Deal' Spurs Recovery

May at table

Image © Gov.UK

- Snapshot: GBP/EUR: 1.1426 +0.23%  | GBP/USD: 1.2768 +0.31%

- May pitches new Brexit deal

- Labour's Thornberry says party won't support May's deal

- Markets see deal failure, new leader as key risk

The British Pound is staging a relief rally on Tuesday, May 21 as markets digest the details of  Prime Minister Theresa May's new Brexit deal. However, the currency's move higher is not expected to extend significantly amongst a distinctly negative reaction to her latest offer from members of her Conservative Party.

The Pound rallied sharply as reports came through that May was poised to offer MPs a vote on a second EU referendum.

However, in a speech this afternoon May says she "does not believe this a route we should take," but that the Government will include in the Withdrawal Agreement Bill a requirement to vote on whether to hold a second referendum.

Therefore, those MPs who want a second referendum must first pass the Brexit deal first.

"Today I am making a serious offer to MPs across Parliament: a new Brexit deal," says May.

May says the new deal will place the government under a legal obligation to find alternatives to the Northern Irish backstop, to ensure it never comes into force.

This pitch is aimed at securing the support of Northern Ireland's DUP whose votes May needs to pass her deal. The DUP have long been wary that the Backstop would cleave Northern Ireland away from the rest of the UK.

May has also committed to protecting the rights of UK workers following Brexit: a key demand made by Labour negotiators.

In order to deliver this, May is proposing the passing of a Workers' Rights Bill.

Further, environmental safeguards and standards will also be guaranteed.

On the contentious issue of Labour's demands for entering a Customs Union with the EU, May says she is prepared to commit into law to allow parliament to decide on the issue of a temporary Customs Union.

Further reports suggest May is to offer MPs a vote on a choice of EU customs arrangements.

The new plans are seen as an attempt to secure the support of the Labour Party to finally pass a Brexit deal: Labour have made entering a customs union and a confirmatory vote the price of backing any deal.

The Pound clearly likes the developments as it sounds like May has moved decisively towards Labour's demands, and therefore it has a shot of passing through parliament.

Should the political reaction to the new deal suggest to markets it has a chance of ratification then we would expect Sterling to reverse some of its recent losses as markets price in the prospect of some kind of deal eventually being passed by the House of Commons.

"The Pound is reacting to Mrs May's potential 'New Brexit Deal' like it was Roosevelt's New Deal," says Viraj Patel, a foreign exchange strategist with Arkera in London. "Let's not get carried away. GBP bulls have been this party & burned too many times. Has to be some serious changes to the deal make the UK parliamentary arithmetic add up."

Pound bounce

Above: Sterling is bid higher on news of a new Brexit proposal from Theresa May.

The reaction to the 'new deal' is important: will Conservative and Labour MPs be more inclined to vote for the deal on the back of the revised offer?

Initial reactions are not looking good for the Prime Minister with key Brexit-leaning MPs suggesting they are not moved.

MP Zac Goldsmith voted for May's deal last time around, but in reaction to May's speed the MP for Richmond says, "I cannot support this convoluted mess. That it takes us towards a rigged referendum between her deal and no Brexit is just grotesque. The PM must go."

"The Prime Minister’s latest proposals are worse than before and would leave us bound deeply in to the EU. It is time to leave on WTO terms," says Jacob Rees-Mogg, a prominent Brexit supporter.

It should be clear the Prime Minister has not done enough, in fact the next vote on the deal could result in an even greater loss by the Government.

This has taken the shine of Sterling's earlier rally.

"Traders are de-risking from the Pound," says Neil Wilson, an analyst with Markets.com. "It’s last chance saloon for Theresa May and her deal and we think she’s going to be out before long with a new PM installed. Mrs May is today attempting to persuade cabinet colleagues she can get the deal through next month, but it looks dead in the water."

Labour don't look prepared to come to the Government's rescue either, despite the clear overtures to their position made by the PM.

Labour’s Emily Thornberry has this morning told BBC Radio 4 her party will vote against the Brexit deal in June because she can see there is very little difference between this bill and PM’s original deal. John McDonnell - the shadow Chancellor - has meanwhile said he believes it unlikely his party will support the Prime Minister's deal.

"The Pound has underperformed on news reports that cross-party Brexit negotiations have concluded, upping political and macroeconomic uncertainty for the UK," says Zach Pandl, a foreign exchange strategist with Goldman Sachs. "While press reports suggest No. 10 may attempt a run-off vote process on Brexit options in early June, most observers seem to see little prospect for a last-minute breakthrough."

To us, the sequence of events remains May's deal will fail and a new Prime Minister will be installed by the end of summer, with a high chance the new leader will adopt a 'Brexit at all costs' policy.

There is therefore a good chance that the Pound's recent recovery bounce will ultimately give way to the broader trend lower.

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Don't Panic on the Pound Yet: Goldman Sachs

While the Pound is seen under pressure, strategists at Wall Street bank Goldman Sachs say it is too early to panic on Sterling's outlook.

"Despite short-term downside risks, we do not expect sustained GBP depreciation and are keeping our forecasts unchanged for the time being," says Zach Pandl, a currency strategist at Goldman Sachs.

The analyst says a lengthy Brexit limbo and likely Conservative Party leadership election could weigh on the British Pound for the time being.

As such, he says little reason to buy the currency on the current bout of weakness.

However, taking a longer-term view, the analyst is more constructive:

"Even a change in PM would not alter some of the basic facts - in particular, opposition in Parliament against a “no deal”/WTO-style exit, and the tension between the hope for a clean break from the EU and the desire to protect the union.

"As a result, despite short-term downside risks, we do not expect sustained GBP depreciation and are keeping our forecasts unchanged for the time being."

Meanwhile JP Morgan have today raised their view on the probability of a 'no deal' Brexit to 25% from 15%, saying they now maintain a base-case scenario where at Boris Johnson becomes Prime Minister, followed by a general election and then another delay to Britain's exit to the end of the year.

JP Morgan raised the probability of an Article 50 extension to 60% versus 50% before and cut the probability of exit on the terms of Prime Minister Theresa May's Withdrawal Agreement to 15% from 35%.

Johnson would be seen ascending to Number 10 by September, meaning a summer of campaigning by Conservative Party hopefuls lies ahead.

"Boris Johnson becomes PM in early September on a 'no deal if we have to' platform," says strategist Malcom Barr. "The EU refuses his central objective of removing the backstop from the Withdrawal Agreement."

"The Commons begins the process of legislating to force Johnson to seek an Article 50 extension, and Johnson calls a general election seeking a mandate for his approach," says Barr.

BannerTime to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

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