Elections Ahead: Pound Sterling now at Risk of Decline vs. Euro and Dollar says Analyst

Johnson heads back towards the polls

Above: File image of Boris Johnson. © Pound Sterling Live. Still courtesy of BBC News

- Pound-to-Euro exchange rate: 1.1570

- Pound-to-Dollar exchange rate: 1.2862

- Downing Street likely to push for General Election

- Any lengthy delay forecast to put the brakes on Sterling's rally

Growing confusion on Brexit and rising odds of a General Election have conspired to push the British Pound lower over recent hours, threatening to put an end to the currency's recent multi-week run of gains. 

Indeed, analysts are predicting the currency will be held down over coming days and weeks if Brexit is delayed to allow for the UK to carry out a General Election, an outcome that is increasingly likely after Parliament last night rejected the Government's programme to deliver Brexit by October 31.

Downing Street last night put the UK on a General Election footing after MPs voted down a 'programme motion' that would have fast-tracked the necessary legislation through Parliament to ensure an October 31 Brexit.

In response to the defeat, Prime Minister Boris Johnson announced he would pause the process of ratifying the Brexit deal in Parliament in order to lobby the EU for a short, technical extension.

The Pound fell in the wake of last night's events in Parliament, as it appears a Brexit deal will now be delayed by a number of weeks, allowing traders to book profits on the currency's rally. "Sterling slipped overnight following the developments in the UK parliament. However, the depreciation was relatively modest and left the Pound still close to the top end of its recent trading range," says Rhys Herber, an economist with Lloyds Bank.

Donald Tusk, the European Council President, has hinted any extension would last until January 31, but it appears there is some debate going on in the EU as to the length of any delay. It is reported France are in favour of a short extension.

Local media are on Wednesday reporting the Prime Minister's office have said the time had come for voters to end the Brexit impasse by deciding whether they wanted "to get Brexit done with Boris or spend 2020 having two referendums on Brexit and Scotland with Jeremy Corbyn".

"We think a general election is looming as i) it is almost impossible for BoJo to keep his "do or die" pledge, ii) he has a negative working majority and iii) the Conservatives are performing nicely in election polls. In terms of the timing of a possible general election, beginning of December seems like the best guess for now," says Morten Lund, an analyst with Nordea Markets.

Pound's first decline in days

Above: Sterling's winning streak against the Dollar ended following the Brexit bill's latest setback in Parliament

The length of any delay to the Brexit process will have implications for the value of Pound Sterling according to Paul Dales, Chief UK Economist with Capital Economics.

"A delay to Brexit now appears the most likely scenario and the chances of a near-term deal have diminished a bit. A short delay to finalise a deal would not be a blow to economic growth and the pound, especially if it were followed by a deal that would eventually prompt both to rise. In that case, we suspect the Pound would climb pretty quickly," says Dales, writing to clients in response to last night's developments in Parliament.

Dales adds however that a lengthy delay to allow for a General Election "would prolong the current uncertainty that is acting as a handbrake on the economy and holding down the Pound."

The GBP/EUR exchange rate had risen as high as 1.1656 earlier in the week as expectations grew that the Prime Minister did in fact have the numbers to pass a Brexit deal, it has since covered its gains and fallen to 1.1570.

The GBP/USD exchange rate had risen to 1.3011, but it has since given back ground to go sub-1.30 and is currently quoted around 1.2862.

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The British Pound came under pressure last night after the House of Commons voted by a margin of 308 to 322 to reject the Governments programme motion, which is simply the timetable proposed by the Government to push the deal through Parliament.

The Pound had rallied over recent days as markets increased bets that a Brexit deal would finally be passed by Parliament; pausing the progress of the deal therefore gives markets cause to book profit on the rally and await the next moves of the Prime Minister.

The defeat on the programme motion came after MPs earlier approved the Withdrawal Agreement Bill (WAB) on a second reading by 329 to 299, which made for a bigger-than-expected majority for the deal.

"For the first time ever, a majority was found for a Brexit deal. However, BoJo lost the more important vote on the Bill’s timetable, making it impossible to leave with a deal by 31 October. The ball is now at the EU’s court," says Lund.

Sterling-Euro fades

Above: GBP/EUR volatility in the wake of Johnson's Brexit timetable vote defeat

The argument made by those MPs who would back the Brexit agreement, but not the timetable, is that there is not enough time to fully scrutinise the WAB's 110 pages before Thursday, when the Government wanted to see the legislation passed by the House of Commons to the House of Lords.

The problem Johnson faces in yielding to MPs and granting them further time to debate the current Brexit legislation is that it invites a barrage of ammendments to be made. Therefore, when the WAB comes back to the House of Commons for its third and final reading, it might look completely different to the deal that was agreed with the EU.

The Government could then again opt to terminate the legislation.

"There is no guarantee that the deal could eventually pass in a so-called third reading where it would be subject to amendments. Most likely such amendments would include both a confirmatory referendum and a deal with a customs union attached which, if passed, could lead to Conservative Brexiteers rejecting the Withdrawal Agreement Bill altogether," says Lund.

The Brexit deal nevertheless remains alive and the prospect of an orderly Brexit remains as the Conservatives would likely campaign under the banner of their deal, therefore the route to a 'no deal' Brexit remains a remote one and under such circumstances we doubt the Pound will suffer significant losses.

"It is difficult to see a path to a no-deal outcome anymore, which also explains why a lot of negativity has been priced out of the GBP," says Mikael Olai Milhøj, Senior Analyst with Danske Bank.

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