Boris Wants a Brexit Deal: Pound Sterling can Recover vs. Euro and Dollar when Markets Get the Message

Boris Johnson and impact on Sterling

Above: Boris Johnson. File image. © The Naked Ape. Accessed Flickr, reproduced under Creative Commons licensing.

- Pound-to-Euro exchange rate at 1.1184 today -0.38%

- Pound-to-Dollar exchange rate at 1.2558 today -0.29%

- Johnson committed to leaving EU with a deal

- Next P.M. not the reckless Brexiteer of the market's assumption

Sterling is under notable selling pressure at the start of the week, finding fresh 5-month lows against the Euro and Dollar.

Losses continue to mount for a currency that is finding little support in a market that continues to prepare for a potential 'no deal' Brexit on October 31, with the current multi-week sell-off being triggered when it became clear Prime Minister Theresa May's Brexit deal would fail to pass through Parliament and her position had therefore become untenable.

Markets are grappling for certainty in a politically-charged environment where a new Prime Minister is being sought and the market expectations for a snap General Election taking place before year-end continues to grow.

Indeed, both Ladbrokes and William Hill have cut odds to reflect a 63% chance probability that the date of the next General Election is to be held in 2019, with betting markets eyeing the installation of a New Prime minister who faces the near-impossible prospect of delivering a Brexit by October 31 with a wafer-thin parliamentary majority.

"Brexit uncertainty continues to simmer in the background to the detriment of the Pound. Britain is in the process of choosing a new Conservative leader, one that shows Brexit advocate Boris Johnson in the lead. Anything that raises the risk of Britain taking the disorderly, no-deal route out of the EU tends to play out as pound negative," says Joe Manimbo, a foreign exchange analyst at Western Union.

There are however concerns that the sell-off might be too agressive, and the market is guilty of over-committing itself to a negative set of outcomes and the Pound is therefore being unduly punished.

This assumption is premised on the observation that Boris Johnson, the favourite in the race to succeed Theresa May as the UK's Prime Minister, has confirmed he will not be pursuing a 'no deal' Brexit.

Johnson - who is 80% likely to be the next PM according to the latest betting market odds - told BBC radio that a 'no deal' would not be a desired outcome.

Speaking on Friday, Johnson confirmed he will however take the UK out of the EU on October 31 if a renegotiated deal cannot be achieved with the EU.

In the interview, Johnson said a 'no deal' Brexit must not be feared, and that the Government has a responsibility to prepare for such an outcome.

"It needs to happen by October 31, and we need to get on and do it," said Johnson. "All those who say that we should delay ... I think they risk doing terminal damage to trust in politics. We have to get on and do this. We've got to be out by October 31."

Importantly, Johnson did stress that leaving without a deal is not his priority, and it is therefore becoming increasingly clear to us that Johnson's priority is renegotiating the existing Brexit deal.

We find this a supportive development from a currency perspective as it tells us that a negotiated Brexit is still a possible outcome for two sides that want to avoid a 'no deal'.

The Pound has been sold over recent weeks as markets believed the odds of a 'no deal' Brexit occuring on October 31 were rising after it became clear that the Brexit deal negotiated by Prime Minister Theresa May would not pass through parliament, and that she would have to step down as a result.

Fears were that the incoming Prime Minister would pursue a Brexit 'at all costs' on October 31, which has been taken as short-hand for a 'no deal', in an attempt to win back voters lost to Nigel Farage's Brexit Party.

"Politics remain in the driver's seat in Sterling pairings. In our view, markets were pricing in a close to 50% chance of a no-deal Brexit at the end of October when they recently pushed EURGBP higher to 0.89. We think this is overdone," says Daniel Trum, CFA, Strategist at UBS. "Our base case is a further extension of the October deadline and eventually general elections in the UK. This should keep the exchange rate in a range around 0.87 over the next 12 months." 0.87 in EUR/GBP translates to 1.15 in GBP/EUR terms.

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It is becoming clear that Johnson is not making pursuing a 'no deal' his headline policy, and instead, he intends to have a go at renegotiating the existing deal.

If markets accept this view, Sterling could find itself supported.

"Declining political risks, especially compared to recent months, may support the Pound in the coming weeks. A lot of negativity is already priced in and the likelihood of leaving the EU without a deal hasn't increased dramatically," says Marc-André Fongern, Head of FX Research at MAF Global Forex in Frankfurt.

Of course, the EU must agree to hold substantive negotiations, and we wonder what would provide them with the cover to come back to the negotiating table after a series of statements warning the next UK Prime Minister that the deal was not up for renegotiation.

It could be that the EU will soon find themselves under notable pressure from the UK side to undertake negotiations or risk becoming the scapegoats for any 'no deal'.

Finding a negotiated solution will almost certainly once again come down to the issue of the Northern Irish backstop: but we heard last week from a senior DUP member that only small changes to the existing deal would be required to secure their backing.

"It doesn't need to be something earth-shattering. We're not asking for something that will fundamentally undermine what has been proposed," said Jeffrey Donaldson, a DUP MP, in reference to the changes they believe are necessary, in remarks made in Dublin on Thursday.

This is important: if the DUP who are partners of the Conservatives in parliament, can back the deal we feel it is almost certain it would pass. The incoming Prime Minister will inherit a minority government that will once again depend on the votes of the DUP's 10 MPs to function.

Johnson meanwhile said in his interview with the BBC that the issue of the Irish backstop, an insurance policy to prevent the return of border controls between Northern Ireland and the Irish republic, could be solved by having goods checks away from the border.

"BoJo is likely the new PM in UK once the dust settles after all the balloting over the next few weeks. The thing that we look forward to the most, is when BoJo takes May’s deal to the commons again, just with a new name. We would by the way prefer to buy GBP, once Boris is confirmed as the PM – buy the rumour, sell the fact (in EUR/GBP)," says Andreas Steno Larsen, an analyst with Nordea Markets.

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