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Pound Sterling Today: Defiant Johnson Determined to Find a Way to Avoid Brexit Delay, Pound Rally Against Euro and Dollar Extends

Johnson in focus

Above: Boris Johnson. © Gov.uk

- Unwinding 'no deal' risk sees Sterling rally extend

- Johnson meet's Ireland's Varadkar, talk of need for deal aids sentiment

- Parliament suspended today

- Move allows Johnson leeway to avoid Brexit extension, this poses downside risks

The UK Government has confirmed Parliament will be suspended from Monday 09 until October 14, it has been confirmed.

The move to suspend Parliament leaves the Government of Prime Minister Boris Johnson free to seek ways to legally avoid having to ask the European Union for another Brexit delay.

As such, expect nerves towards Sterling to remain elevated in the near-term and we remain guarded to a prospective turn in fortunes for a currency that has enjoyed a strong recovery over recent days.

The Pound has been rising against the Euro, U.S. Dollar and other major currencies as markets judge the Brexit pendulum has once again swung away from a 'no deal' Brexit.

Recent political developments have "narrowed the path to a 'no deal' Brexit, skewing near-term risks to Sterling to the upside," says Zach Pandl, a foreign exchange strategist with Goldman Sachs.

If we look at Sterling's performance over the past month, we can see it is the best performing major currency:

Currency performance

The Pound-to-Euro exchange rate has recovered from August lows at 1.0722 to trade at 1.1189 at the time of writing, its highest level since late July.

The Pound-to-Dollar exchange rate has recovered 1.1959, reached on September 01, to be quoted at 1.2363 at the time of writing.

A bill to prevent Britain leaving the European Union on October 31 without a deal by forcing Johnson to seek a delay is due to become law on Monday, but a government spokesman said the Government remains determined in its stance to not seek any extension to the deadline.

This leaves us questioning what plans the Government has lined up to deliver on Johnson's promise to take the UK out of the EU "come what may" on October 31, and view any surprises here as posing potential downside for the Pound.

"The prime minister will not sanction any more pointless delays to Brexit," the spokesman quoted by Reuters said, and lawmakers should vote for a snap election which Johnson will call for later on Monday to resolve the issue.

It is widely expected that opposition parties and independent MPs will stick to their pledge to vote against any vote until a Brexit delay has been achieved.

Varadkar meeting

Above: Johnson & Varadkar in Dublin on Monday, Sept. 09. File photo (C) Pound Sterling Live, Still Courtesy of Bloomberg.

The latest moves higher in Sterling comes after Johnson and Ireland's Taoiseach Leo Varadkar met for the first time Monday, and a briefing from the two sides revealed significant gaps in their approach to Brexit remain.

In a joint statement, Ireland and the UK said they were committed to securing a Brexit agreement with the European Union, and that the meeting was an essential and timely opportunity to establish a relationship and better understand each other's positions.

"While they agreed that the discussions are at an early stage, common ground was established in some areas although significant gaps remain," read the statement.

"There was no getting way from Brexit as the new week kicked off, hardly surprising given the flow of headlines across the weekend. However, today it was Boris Johnson’s softer approach to Brexit that grabbed traders’ attention," says Fiona Cincotta at City Index. "Bojo sounding keen to get a deal done when he was speaking with the Irish Prime Minister helped boost demand for the pound, as did signs that the UK economy was holding up even as Westminster was crumbling."

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Johnson Seeking Legal Avenues to Avoiding Brexit Delay

We remain highly cautious of any shifts in sentiment that could reverse the recent recovery rally in Sterling, particularly if it becomes clear the Government does in fact have a strategy to deliver Brexit without a deal on October 31.

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 on Sunday that 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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