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- MUFG says GBP to struggle amid mounting 'no deal' Brexit concerns.
- As Labour fails to block no deal, Johnson comes 1st in leadership bid.
- But Commerzbank technical analyst looks for continued GBPUSD gains.
The Pound will trade on a weaker footing over the coming weeks as concerns over the seemingly rising probability of a 'no deal' Brexit mount, according to global banking giant MUFG, but technical analysts at Germany's Commerzbank are looking for Sterling to make further gains in the short-term.
Pound Sterling took a knock on Wednesday after an opposition Labour Party attempt to sieze control of the parliamentary agenda toward the end of June failed. Opposition lawmakers had sought to force through legislation that would prevent the governmnent from leaving the EU without a "deal" in October.
"The vote came on the day when the heavy favourite to become the next Tory leader Boris Johnson made a key note speech yesterday ahead of the first leadership ballot today. He pledged to take the UK out of the EU on the 31st October. He is not aiming for a “No Deal” Brexit, and is optimistic that he can renegotiate the Withdrawal Agreement. However if the EU is not willing to meet his demands, it implies he is likely to more seriously threaten a “No Deal” Brexit," says MUFG's Lee Hardman.
Wednesday's attempt to wrestle control of the parliamentary agenda from the government was defeated by a narrow margin of just 11 votes, with 309 rejecting the idea and only 298 in favour of it. Ten Conservative Party MPs backed the opposition, but a similar number of Labour MPs voted against it.
The House of Commons votes 309 to 298 to reject the Opposition Day Business of the House (United Kingdom’s withdrawal from the European Union) Motion.— UK House of Commons (@HouseofCommons) June 12, 2019
The scheduling of 25 June 2019 remains under the control of the Government. pic.twitter.com/BBzNKEwFNQ
It followed a similar action by Labour's Yvette Cooper back in March, who instigated a similar process that forced the government into requesting a further extension of the Article 50 negotiating window after Prime Minister Theresa May's EU withdrawal agreement was rejected a third time by lawmakers.
Markets had been led by the earlier success to believe parliament could prevent any government or Prime Minister from taking the UK out of the EU without first having struck a formal withdrawal agreement with Brussels, which still insists the controversial 'Northern Irish backstop' must feature in any agreement.
"In these circumstances, the pound should continue to trade on a weaker footing in the near-term undermined by the ongoing heightened state of UK political and Brexit uncertainty. “No Deal” Brexit fears will remain in focus," Hardman warns.
The odds of a 'no deal' Brexit have improved in favour of its advocates in recent weeks after Prime Minister Theresa May stood down as leader of the Conservative Party, triggering a leadership election that at least appears on course to install a Brexit-supporting Prime Minister in 10 Downing Street.
Boris Johnson, a former foreign secretary and leader in one of the leave-supporting referendum campaigns, is currently the frontrunner after coming in first place during the opening round of the contest Thursday, which saw Conservative Party MPs voting for their preferred candidate.
Above: Pound-to-Dollar rate shown at hourly intervals.
The Pound-to-Dollar rate was quoted 0.01% higher at 1.2694 Thursday midway through a moribund session in which it remained close to the low point established in the previous session. The exchange rate is now down 0.37% for the 2019 year after once having risen, in February, by 5%.
Above: Pound-to-Dollar rate shown at hourly intervals.
"GBP/USD continues to probe the 23.6% retracement at 1.2753 and this has again held. We are looking for the correction higher to extend to the 38.2% retracement at 1.2873, where we suspect it will stall," says Karen Jones, head of technical analysis at Commerzbank.
MUFG and many other analysts are increasingly forecasting a weak summer and autumn performance from Pound Sterling because on October 31, the UK is set to leave the EU regardless of whether parliament has approved PM May's withdrawal agreement.
The only way that a 'no deal' Brexit could be stopped at that point would be through either a further extension of the Article 50 period, or a revocation of the Article 50 notification. The latter would risk the demise of the governing Conservative Party while it's far from obvious that the EU would agree to another extension if there's by that point, no prospect of the UK parliament passing the withdrawal agreement.
However, Commerzbank's Jones has been buying the Pound-to-Dollar rate for a number of weeks now and is still looking for it to go on rising in the short term. Jones entered her 'long' position at 1.2630 and says she will reduce the bet when the market reaches 1.2750 before exiting it entirely around 1.2875.
"GBP/USD will need to regain [1.2873] on a closing basis in order to alleviate immediate downside pressure and avert further losses to the 1.2444 December 2018 low. Initial support is the 1.2559 end of May low. Minor resistance lies at the 1.2772 February low ahead of the 1.2865 April low," Jones writes, in a note to clients Thursday.
Above: Commerzbank Pound-to-Dollar rate chart showing technical indicators.
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