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Boris Doubles-Down on Quest for Brexit Deal, Pound Back Above Key Levels vs. Euro & Dollar

Boris Johnson on Brexit

Above: Boris Johnson lays out his Brexit strategy in more detail. Image (C) Pound Sterling Live. Still courtesy of BBC.

- Snapshot: GBP/EUR: 1.1206 +0.32% | GBP/USD: 1.2758 +0.16%

- Johnson believes 'no deal' unlikely

- Says change in political realities will see EU come to negotiating table

The British Pound was seen trading higher against a host of major currencies on Tuesday, confirming a short-term floor might be building under the UK currency, in part aided by comments from incoming Prime Minister Boris Johnson that he does not believe "for a moment" that a 'no deal' Brexit will take place on October 31.

The Pound-to-Euro exchange rate is quoted at 1.12, and we are seeing a range developing between 1.1150 and 1.1250: the pair has respected this range since June 07 and we are wondering whether this range will be respected while markets await more clarity on the UK's political future.

The Pound-to-Dollar exchange rate is trading at 1.2764; the pair has actually now risen for five consecutive days in a row ever since lows at 1.2506 have been rejected: note that here a broader decline in the Dollar has proven helpful to those looking to transact out of Sterling and into Dollars. "While the price action from the 1.2505 lows is encouraging and suggests a further recovery within the medium-term range can be seen, prices are still struggling to gain momentum through the 1.2750/75 area of resistance. We are therefore open to further consolidation," says Robin Wilkin, a strategist with Lloyds Bank.

But what is the cause for the apparent bottoming in the Pound, and can it extend?

We have been saying for some time now that what will be the most significant driver of Sterling over coming days and weeks is not that Boris Johnson will become the next Prime Minister of the UK, instead currency markets will be more interested in what he says about Brexit while on the campaign trail.

With this in mind, Johnson has overnight given an in-depth television interview in which he addresses Brexit, and we find what he said to be significant.

In an interview with the BBC's Laura Kuenssberg, Johnson shows his prime objective is to secure a negotiated deal that can pass through parliament and he says he believes the EU would move on the Irish backstop, but failing that, Parliament would listen and be ready to vote for 'no deal'.

But, "it is not where I want us to end up, it's not where I believe for a moment we will end up," says Johnson of a 'no deal' Brexit. Instead, he will talk to European Union leaders to try and make the existing deal work.

"In my opinion, Johnson's rhetoric has changed considerably in recent weeks as he keeps stressing that Britain is unlikely to leave the EU without a deal. This confirms my basic assumption, which is why I'm slightly optimistic regarding a further appreciation of the Pound," says Marc-André Fongern, Head of FX Research at MAF Global Forex.

Last week we wrote that markets could be kinder to Sterling should they realise Johnson is dedicated to getting a deal through parliament and that a negotiated Brexit is his preferred strategy. The UK currency appears to have struggled over recent weeks on an assumption the front-runner to replace Theresa May is running on a 'no deal' Brexit ticket.

We feel there has been a lot of Johnson-inspired selling on the belief that his favoured route forward is the achievement of a 'no deal'.

The interview suggests Johnson is prepared to dismantle the current Brexit deal, and discard the pieces that won't work.

"Take the bits that are serviceable and get them done," says Johnson. In particular Johnson is prepared to guarantee the rights of EU citizens following Brexit.

But he says the issue of paying the EU £39BN is "more difficult" and that the figure is at the upper end of EU expectations.

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With regards to the Northern Irish backstop - the single most contentious issue in the Brexit deal that ultimately sank May's Premiership - Johnson does indeed want to ditch the backstop.

He says the border question should be removed from the current Withdrawal Agreement and dealt with after October 31 utilising the "abundant technical fixes" available to facilitate an open border.

Of course, European leaders have made it quite clear they are not prepared to negotiate the Brexit deal and herein lies the big challenge for the new Prime Minister.

"Tonight EU sources were scathing about the idea of a transition/implementation period without a deal - and I mean SCATHING in the most dramatic terms," reports Adam Fleming, the BBC's Brussels Correspondent, on the EU's reaction to Johnson's interview.

Flemming does add that he wonders if they’d be less scathing when they see this "massive caveat" from the Johnson interview:

"You're going to need some kind of agreement and that's certainly what I'm aiming for in order, as you rightly say Laura, to get an implementation period."

Johnson says his vision will be facilitated by his belief that a great deal has changed in politics on both sides of the channel since March, and that there will be more of an appetite to take another look at the Brexit deal from both sides.

In the UK he says there will be a real willingness by both Labour and the Conservatives to see Brexit through as both parties recognise they face extinction unless they deliver Brexit.

He also describes Theresa May's Government as being the "authors of our own incarceration" when building, and agreeing to, the Irish backstop.

"What has changed, and what will be so different, is that the intellectual capital that had been invested in the whole backstop had really come from the UK side, we had committed to it, we actually helped to invent it, we were the authors of our own incarceration. Take that away, change the approach of the UK negotiators and you have a very different outcome," says Johnson.

On the matter of a 'no deal' Brexit, Johnson appears to be willing to use the threat of such an outcome as a central negotiating tool.

"The other tool of negotiation you should use... is the UK will be ready to come out on WTO terms," says Johnson.

Asked if he will provide an absolute guarantee to come out on October 31 he says "of course".

But, "it is not where I want us to end up, it's not where I believe for a moment we will end up," says Johnson of a 'no deal' Brexit. "Under a 'no deal' Brexit "the UK Government is never going to impose checks, or a hard border of any kind, in Northern Ireland."

Asked if he believed Parliament would pass a 'no deal' Brexit, Johnson says he does, "both sides of the House understand they will face mortal retribution from the electorate unless we get on and do it."

The 'fighting talk' from Johnson comes up against the reality that the Government he inherits will have a wafer-thin majority of just three MPs, and a number of remain-leaning Conservatives are prepared to vote against their own Government to prevent a 'no deal'.

It is believed that the opposition will call a vote of no-confidence in the Government were it to make a 'no deal' Brexit official policy, and it would take a handful of Conservatives to vote with the opposition to topple the administration.

Of course, we would assume a number of Labour MPs would rebel against the motion in order to deliver Brexit which will make the outcome a close-call.

The prospect of a General Election taking place before 2019 is over has risen over recent weeks and we believe this is another major source of uncertainty for Sterling, and the currency will stay under pressure as a result.

However we would imagine that at some point the sell-off in the currency must end as the prospect of a positive outcome remains alive: that unicorns do in fact exist and Johnson succeeds in delivering what he intends, and the UK does leave the EU with a negotiated deal.

There is a strong stance the Pound will adopt a wait-and-see approach over coming days and weeks and as such the ranges mentioned earlier in the article are likely to stick.

"Should Brexit end up with Parliament accepting the withdrawal deal or in a second referendum it will trigger a significant recovery of the GBP. Should it end up with a hard Brexit or a snap election, the GBP would instead become even weaker," says Richard Falkenhäll, Senior Currency Strategist with SEB.

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