Pound-to-Dollar Rate will Fall to Post-referendum Low if May's Deal Rejected says MUFG

© IRStone, Adobe Stock

- GBP to take lead from Brexit developments and charts says MUFG.

- Rejection of May's deal could see GBPUSD fall into 1.20-1.25 range.

- As market discounts GBP due to fears of a "no deal" exit from the EU.

The Pound will wrack up yet more losses against the Dollar next month and may fall to within inches of its post-referendum low if Prime Minister Theresa May's deal is rejected by parliament on December 11, according to analysts at MUFG

A rejection of the Withdrawal Agreement and future relationship declaration brought back from Brussels earlier this month by May would see markets fret that a so-called no deal Brexit has become all but inevitable, according to the Japanese lender, which is also one of the world's largest banks. 

"The risk of further dollar strength ahead not only relates to the Fed hiking next month but also given the downside risks for the pound and euro on other factors. We are now assuming the May Brexit deal agreed with the EU will not pass parliament on 11th December," says Derek Halpenny, European head of markets research at MUFG

Sir Michael Fallon, a Conservative Party MP and former defence minister, said Tuesday that May's deal covering terms of the U.K.'s exit from the EU is "doomed" and that it should be renegotiated because too many of the government's parliamentarians oppose it. 

This is a bad omen for the deal itself, the Pound and the Prime Minister according to Halpenny, who says parliament's rejection of the Withdrawal Agreement will open up a "Pandora's Box" but that there are too many variables to reliably predict the final outcome from the pandemonium that might ensue. 

PM May could go back to Brussels and attempt to renegotiate the deal if it fails in parliament, or she might attempt to buy further time to get it past lawmakers by asking for an extension of the article 50 period Halpenny says.

The UK parliament might also decide to push for an alternative to May's Brexit proposal, such as the so-called Norway option where the country would remain in the EU's legislative orbit but outside the customs union. 

A second referendum or another general election are also both possible outcomes, and so too is the oft-maligned "no deal" route out of the EU. 

"There are lots of ifs and buts to these scenarios," Halpenny says. "But the conclusion is clear – this deal being voted down on 11th December is a disaster in terms of the uncertainty it will create through the turn of the year."

The Pound has fallen from 1.3210 against the Dollarin early October to 1.2747 this week and has been as low as 1.2694 during the intervening period. 

October's reports that May had reached an agreement covering terms of the UK's exit from the EU had originally boosted Sterling but opposition to the deal from the Conservatives' confidence and supply partner, the Democratic Unionist Party, saw those gains quickly unwound. 

And since opposition to the agreement has become more widespread, and now exists on a cross-party basis including among members of the governing Conservatives, weakness in Sterling exchange rates has become more persistent. Halpenny says that weakness is here to stay for the time being. 

"There are some key technical support levels for GBP/USD that are now close – 1.2699; 1.2696; and 1.2662; all previous lows in October and August – and a breach of these levels will open up a move back into a 1.2000-1.2500 range," Halpenny writes, in a breifing intended for MUFG's clients Wednesday. 

The Pound-to-Dollar rate was quoted 0.40% higher at 1.2792 Wednesday but is down -5.2% for 2018. It is still more than 11% below the 1.45 rate that prevailed on the night of the June 23, 2016 Brexit referendum.

A handful of lawmakers have already made a failed bid to topple Prime Minister Theresa May after she returned from Brussels with agreements that they say, rather than "taking back control" from the EU, could actually enfranchise it with even more power over the UK.

The future relationship declaration sets out what purports to be a joint ambition for a Canada-style free trade agreement between the UK and EU that would take effect at the end of a transition period currently scheduled to run between March 29, 2019 and the end of December 2020.

However, in order to get to that trade deal, it must first be negotiated with the UK inside a "transition period". By that time, the U.K. will already have signed up to an international treaty called the "Withdrawal Agreement" that could see the country forced into an unenviable position should PM May prove unable to satisfy EU negotiators.

That unenviable position would see the government choose between remaining in "transition", during which time little about the relationship will change, and life under a so-called backstop arrangement until the EU decides otherwise.

Permanent transition would see the UK continue to make payments to the EU and remain under its legislative auspices, while being denied representation in EU institutions and influence over relevant legislation.

The purported backstop would see the UK held within a customs union with the EU, but the Northern Irish province subjected to "Northern Ireland specific regulatory alignment".

The PM and EU negotiators claim the arrangements are intented to ensure any future trade arrangements will not compromise the EU single market and lead the EU to impose a physical border that divides the island of Ireland.

But Brexiteers say there are other ways of avoiding a division of Ireland and that the proposals hand the EU something close to a veto over the U.K.'s departure from the union while committing the country to paying a £39 billion "Brexit Bill" from the outset. Many claim they'll vote against it in parliament.

Northern Irish lawmakers, on whose support the Prime Minister depends for a majority in parliament, say the proposals will undermine the province's union with Great Britain and have also pledged to vote against it in the House of Commons.

Bank-beating exchange rates. Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here

GBP/USD download banner