- Potential for UK membership of EU Customs Union growing: £ +ve
- But, remaining in Customs Union could introduce political uncertainty: £ -ve
- BofAML prepare for near-term GBP weakness, maintain longer-term constructive view
Above: Theresa May's position as leader of the Conservative Party will be questioned were she to keep the UK in a Customs Union with the EU. Image © Lee Goddard / Number 10 Downing Street
The Pound has opened up slightly higher against the Euro and US dollar at the start of the new week with some analysts suggesting Brexit headlines over the weekend as being behind the move.
The UK currency does however start the new week having suffered a bout of heavy selling in the previous week and we note sentiment and momentum now appears to be pitted against the currency, therefore any resilience might be short-lived in nature.
The Pound-to-Euro exchange rate is now quoted at 1.1420, having been as high as 1.1599 just last week and our latest technical studies suggest momentum might be working against GBP/EUR. The Pound-to-Dollar exchange rate is trading at 1.4020, but it has been as high as 1.4376 this month while our technical studies confirm 1.40 to be a key support level.
Brexit appears to be back at the top of the UK's political agenda as we head into month-end with the news that the EU is set to "comprehensively" reject Theresa May's Brexit Irish border solution, which is in turn creating doubts as to whether the UK will be able to ultimately leave the European Union's customs union, as has been the Government's signposted intention.
It therefore appears that the Irish border question might finally be coming to an head, which is significant as an impasse here stalls the entire process and could suddenly prompt markets into repricing a no-deal risk-premium back into the Pound which could generate significant selling pressures.
But, as has often been the case in the past, calling direction in Sterling when it comes to politically-generated headlines is incredibly difficult and working out the Irish border/customs union impact is something of a double-edged sword for the UK currency we find.
"GBP has been the victim of sudden doubts about a May hike; but could Brexit come to the rescue?" asks Neil Mellor, Senior Currency Strategist with BNY Mellon.
Customs Union Membership: This is Good and Bad for the Pound
Right now, the key question for Brexit resides with the Irish border where the European Union appears unwilling to countenance any creative suggestions from the UK on how to avoid a hard border while at the same time taking the UK and Northern Ireland out of the customs union.
This combined with last week's vote in the House of Lords to force a government rethink on customs union membership has resulted in what appears to be a multi-front push to keep the UK in the customs union.
There is growing speculation that the UK might have little choice but to keep Britain within the Customs Union which would make the border question disappear and weekend reports suggest May is looking at whether there are types of 'custom union' options available that could serve both her objectives of avoiding a hard border in Ireland and leaving the existing Customs Union.
This should be good for the Pound as staying the customs union eliminates uncertainty for businesses and is suggestive of a a softer-style Brexit.
"Our constructive view on the Brexit negotiations also support medium-term GBP upside as the tail risks of a disruptive exit continue to fall and customs unions arrangements cannot be ruled out," says Athanasios Vamvakidis, an FX Strategist with Bank of America Merrill Lynch Global Research.
BofAML have reiterated to clients that they maintain a constructive stance on the Pound which is undervalued according to the UK's current business cycle, however they do foresee the potential for some near-term weakness and have exited a GBP/USD trade as a result.
"Just as fundamental support for GBP has taken a knock, Brexit may have thrown up something for bulls to ponder: the rather knotty question of the UK/Irish border," says BNY Mellon's Mellor, "in truth, the market has shown willingness to support the government’s progress on Brexit; but there is little doubt that by dispensing with abstruse and protracted negotiations, such a U-turn would be well received in the market."
BUT - and this is a big one - if May were to suggest the UK is staying in the Customs Union she could face a sizeable backlash from her own party, to the extent that her tenure as leader could be challenged.
This political uncertainty would almost certainly be detrimental for the Pound as it currency's detest uncertainty.
The promise by No10 to turn next month’s crunch customs union vote into a vote of confidence in Theresa May is **the** ultimate display of ERG’s power - the 70 strong Brexit grouping inside the Tory party - over her administration.— Sam Coates Times (@SamCoatesTimes) April 23, 2018
No10 gambling Tory remain rebels not as brave
The Prime Minister's office has on the morning of Monday, April 23 rejected the idea of any significant shift in the Government's policy on the Customs Union in a press communiqué:
"The position remains very clear: we don’t think staying in a customs union is the right thing to do and it isn’t government policy to do so."
Jeremy Hunt, the health secretary, meanwhile told BBC1’s Breakfast on Monday, “Theresa May’s position on this has been very, very clear,” he said. “She has said that we are not going to be part of the customs union or any customs union. That position hasn’t changed and Downing Street have been clear about that this morning.”
John Redwood, an ardent pro-leave Conservative parliamentarian - and one that would surely take part in any revolt against the Prime Minister on a diluted Brexit - told BBC Radio 4 he did not feel that No 10’s reiteration of the plan to leave any form of customs union had been necessary:
“I don’t think I needed reassuring. I’ve heard many times the prime minister say that it is our policy to leave the single market and customs union.
“More importantly, on a three-line whip, we have twice now had formal, important votes in the House of Commons on this, and the House of Commons voted on both occasions by a big margin that we should leave the single market and the customs union.”
At this juncture we can say the situation remains contained from a foreign exchange perspective, but we cannot say the Pound is going to continue ignoring evolving Brexit headlines. We believe readers should be aware of any increase in headline-driven volatility which could become increasingly likely if the Irish border question fails to progress and cements a stalemate scenario.
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