Above: Boris Johnson. © Pound Sterling Live
- Pound-to-Dollar exchange rate @ 1.2369
- Pound-to-Euro exchange rate @ 1.1217
- UK economic growth beats expectations
- Johnson looks to legally prevent a Brexit extension
- Parliament could be suspended from as early as today
A strong start to the new week for Pound Sterling which is seen higher against the Euro, Dollar and other major currencies, helped by stronger-than-forecast economic growth data and shrinking odds of a 'no deal' Brexit taking place on October 31.
The UK economy grew 0.3% in July reports the ONS, with all components apart from agriculture showing growth, a figure that beat analyst expectations for 0.1% growth to be recorded.
Economists say the uptick in July will mean the economy grows in the third quarter of 2019 and the UK avoids recession: recall, second quarter GDP data showed the economy shrank 0.2%, and it requires two consecutive quarters of shrinkage for a recession to be called.
"The pick-up in GDP in July is a reassuring sign that the economy is on course to grow at a solid—perhaps even above-trend—rate in Q3, thereby substantially weakening the case for the MPC to cut Bank Rate before Britain’s Brexit path is known. The upside surprise came from the services sector, which displayed broad-based strength and did not seemingly benefit from any one-off stimuli," says Samuel Tombs, UK Economist with Pantheon Macroeconomics.
Pantheon Macroeconomics are forecasting the UK economy to grow by 0.4% in the third quarter of 2019.
"The British Pound is currently benefiting primarily from the reduced likelihood of a no-deal scenario, as well as a somewhat solid domestic economy. Given the numerous political imponderables, however, a sustained recovery of the currency is not yet to be expected," says Marc-André Fongern, an analyst with MAF Global Forex.
While the economic numbers are supportive of Sterling, we remain wary that politics remains the overarching concern for the currency and market nerves will remain elevated over coming days amidst reports that Prime Minister Boris Johnson is exploring legal routes to thwarting Parliament and delivering Brexit on October 31.
A law struck by Parliament last week will today come into force: it requires the Prime Minister to attend the European Council meeting on October 17 and make an official request for a Brexit delay.
Johnson has however repeatedly said that under no circumstances would he make such a request, in line with his commitment to deliver Brexit by the October 31 deadline at all costs.
If Johnson succeeds in finding a way to deliver Brexit, while at the same time following the letter of the law, we believe Sterling would most likely come under renewed pressure.
Sterling is a politically-charged currency that tends to reflect the market's gauge on the probabilities of a 'no deal' Brexit, tending to fall when that probability rises.
Reports suggest the favoured option involves Johnson sending a letter requesting a Brexit extension, as per the legal requirement set by Parliament, but then sending an accompanying letter stating that the Government does not want any delay after October 31.
The EU has said that any extension to Brexit must have a compelling reason, it is widely understood that a delay would only be granted for a General Election or a new referendum to be held. If the Government says there is no reason to grant an extension, and they don't in fact want one, the EU could opt to allow the deadline to pass.
We however doubt the EU would do this, they will almost certainly construct a narrative for another delay to be granted on the observation that a General Election taking place in 2019 is a certainty.
Nevertheless, a Downing Street official told The Telegraph: "we intend to sabotage any extension. The Surrender Bill only kicks in if an extension is offered. Once people realise our plans, there is a good chance we won’t be offered a delay. Even if we are, we intend to sabotage that too.”
Parliament will today be offered another chance to vote for a General Election to take place before October 17, thereby allowing the victor of the vote to set out their position to the EU; crucially the position will come with a clear mandate from the British people.
Opposition parties are however refusing to agree to this vote, saying they want Brexit delayed before any vote, probably judging that such an outcome would significantly hurt the Conservatives in the polls.
“Monday is the last chance for Corbyn to be prime minister and negotiate his delay at Brussels on Oct 17-18. If he opposes the people having their say in an election on Oct 15, then MPs should realise they may not be able to stop no deal," the Downing Street source told the Telegraph. “The MPs will be sent home this week and have no further chance to shape negotiations on Oct 17.”
MPs opposed to a 'no deal' Brexit will be nervous: Parliament could suspended after the Government loses its vote for an early election, leaving them powerless to legislate further.
The Government therefore guides the direction of travel once Parliament is prorogued.
Foreign Secretary Dominic Raab on Sunday says the legislation to block a 'no deal' is "lousy", saying on Sky News: “we are going to look at it very carefully, test what it legally requires and what it doesn’t require and that’s the responsible thing to do, because it’s such a bad piece of legislation."
Sajid Javid, the Chancellor, told the BBC's Andrew Marr programme the Government "will not be asking for an extension".
There is a lot to play for, the situation is unpredictable, and this will certainly keep markets nervous.
We therefore would expect Sterling to settle down as traders await fresh move, and would expect surges in volatility in when developments occur.
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