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Pound Heavy as Conservatives Lean Towards 'No Deal' Brexit

Brexit Party's Farage

Above: The Brexit Party's Nigel Farage has seized control of the UK's Brexit agenda following his party's strong showing in European elections. File Image © Gage Skidmore, accessed Flickr, CC license.

- Snapshot: GBP/EUR @ 1.1337 +0.04% | GBP/USD @ 1.2648 -0.07%

- Conservatives swing sharply towards 'no deal' Brexit

- Labour swinging towards backing 2nd referendum

- Euro up as Eurosceptic earthquake avoided in recent polls

Pound Sterling appears to be entering a tentative sideways trading pattern against both the Euro and U.S. Dollar as the countdown to the end of what has been a very difficult month for the currency begins.

Gone are the relentless consecutive days of decline that has dominated price action over the recent past as markets adopt a wait-and-see approach to the currency amidst indications that the Conservatives are to adopt a 'Brexit at all costs' stance, while the opposition Labour Party appears to be pivoting to fully supporting a second EU referendum.

So the headlines are a contradictionary mix for currency traders at present: 'no deal' Brexit = negative, 2nd EU referendum = positive.

The Conservative Party is likely to be headed by a 'no deal' Brexit advocate by the end of summer with leadership contenders apparently embracing such an outcome in an attempt to fend off the surging popularity of Nigel Farage's Brexit Party.

Front-runner Boris Johnson has reacted to the EU polls that saw the Conservative's vote share plummet to below 9% saying a decisive break from the EU was now more important than avoiding a 'no deal'.

Leadership contender Andrew Leadsom agrees, while Dominic Raab said the party needed to show “unflinching resolve” to “get on and leave the EU” even without a deal.

Esther McVey, the former work and pensions secretary, warned that a cross-party Brexit agreement was now “not possible”.

However, Jeremy Hunt - a self-confessed 'born again' Brexiteer - says a 'no deal' would be political suicide for the party, a move that will almost certainly cost him were he to he make the final two who are subject to a vote by the Conservative membership.

"The outcome of Brexit has become more binary, with a reduced chance of a compromise negotiated outcome," says Jacob Nell, Economist with Morgan Stanley in London. "We think the success of the Brexit party is likely to put the Conservatives under pressure to support a harder version of Brexit, while the success of the parties who support staying in the EU is likely to put Labour under pressure to support a second referendum."

The EU elections saw the Brexit Party of Nigel Farage record a comfortable win after securing a 31.7% share of the vote, earning them 29 seats in the EU parliament, making them the largest single party in the parliament.

The Liberal Democrats secured 18.5% of the vote and 16 seats ahead of Labour's 14.1% and 10 seats while the Green's saw their vote share rise to 11.1% which gave them 7 seats.

The Conservatives scored 8.7% and took 4 seats, ahead of UKIP's 3.6%.

A rapid increase in market expectations that a 'no deal' Brexit will take place on October 31 has seen the value of Sterling fall sharply during the course of May as investors demand more of a premium for holding a perceptibly risker currency.

The Pound-to-Euro exchange rate has fallen 2.5% over the course of the past month and is quoted at 1.1333 at the time of writing, the May high is located at 1.1776.

The Pound-to-Dollar exchange rate has fallen 2.70% to read at 1.2671 at the time of writing, having been as high as 1.3179 earlier this month.

"It’s hard to see any near-term positives to keep the currency supported or to suggest a rebound. There are a host of reasons to be negative on GBP for now and we’ve run out of any positives that are likely to arise in the short-term," says Jordan Rochester, a foreign exchange strategist with global investment bank Nomura.

Nomura have recommended a bet against the Pound following the latest developments in UK politics, looking for the exchange rate to fall down towards 1.1050.

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Labour Pivoting towards 2nd EU Referendum

Both establishment parties appear to have paid the cost for not having a clear, clean line on Brexit.

For Labour, the official stance of seeking to deliver a General Election to allow them to put forward their 'soft' Brexit vision has not made an impact with voters.

Their position on a second referendum is that they would call for one only if they could not secure a General Election.

But, the losses suffered by the party in the EU polls suggest they will be quick to adopt a stance on a second EU referendum.

"Of course we want a general election... but it's highly unlikely Tories are going to vote for that now after the results last week; turkeys don't vote for Christmas," says Shadow chancellor John McDonnell in an interview with Sky News on Tuesday, May 28.

"So our only option now is go back to the people in a referendum, and I think that's the position we're in now," says McDonnell.

Asked if Jeremy Corbyn backed the position, Mr McDonnell added: "Jeremy has said that already - he's made it absolutely clear."

 

The Euro Avoids a Political Earthquake

The Euro is looking stronger this week as it becomes clear that a eurosceptic political earthquake in Europe has been avoided with the traditional centrist parties maintaining a dominance in the European Parliament.

The European Union's traditional centrist parties have come through the 2019 vote to find they still control the European Union's parliament, ensuring anti-EU and 'fringe' parties will be unable to derail the European project,

The European People's Party - the centre-right grouping in the European Parliament - hold 24% of seats while the centre-left S&D group hold 19.3% of the seats.

The ALDE Group - that the UK's Liberal Democrats would associate with - hold 15.5% of seats. Added together there is a comfortable majority of 58.5% for the traditional main stream parties.

The pro-EU Greens grouping hold a further 9.2%, further shoring up a pro-EU majority.

The Eurosceptic ECR Group hold 7.9% of the vote while the eurosceptic ENF grouping, that Marine Le Pen's National Rally dominate, hold 7.7%.

"The often-feared rise of EU-skeptical parties has not materialised. The gains are simply too small and it does not look like the parties are set to unite themselves more than they did in the previous parliament," says Bert Colijn, Senior Economist for the Eurozone at ING Bank N.V.

 

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