Ahead of Monday’s House of Commons indicative votes, Sterling posted gradual and steady gains against many major currencies as investors tried to do the impossible and predict the likely outcome of the tonight’ critical Brexit votes. As of writing the Pound to Euro exchange rate is +0.56% higher at €1.166 today and Pound to US Dollar is +0.65% higher at $1.310.
Prime Minister Theresa May’s office hinted the government could secure and legislation forcing Britain to follow the path of a soft Brexit from the EU.
Another dry statement from Downing Street went like “Parliament is continuing the process to see if there’s a stable majority for a version of Brexit, we don’t have any intention of involving the Queen in the process.”
However, it’s rumoured that Prime Minister Theresa May may be strong-armed (as a last resort), ask the Queen to refuse Royal Assent for such legislation as the effort to produce it will have turned centuries of precedent and convention into legal turmoil.
For once the main issue isn’t the Irish backstop, although that doesn’t seem to have been progressed. A new issue that has arisen is the customs union known as a “Common Market 2.0” including single market and customs union membership with two separate scenarios under which another referendum could be called. MPs will also, again, vote on a motion calling for a “no deal Brexit”. The Cabinet is rumoured to split both ways (far Remainer or strong Leaver) with expected resignations regardless of the outcome.
If parliament finds a majority for a soft Brexit option or second referendum, the government could have grounds to argue that such an outcome is inconsistent with its 2017 election manifesto and the 2016 EU referendum. A stand-off between parliament and government could end in a snap general election where, according to one poll last week, Labour was ahead by 5 points.
Currency technical talk
The Pound-to-Euro rate was 0.84% higher at 1.1726 during midday trading on Monday. Interestingly for the year, it’s up 5.5% complementing a “V” bounce with the stock markets. The exchange rate has been on a tear this quarter and has recently broken above the 1.16 top of a long-term range but it has been higher previously touching 1.18.
“GBP may dribble lower as it’s status quo with one day less until the April 12 deadline,” according to Elsa Lignos, head of FX strategy at RBC Capital Markets. “The closer we get to April 12 (and the higher the perceived risk of no-deal exit), the more likely it is that a no-confidence vote or something else will happen to break the stalemate.”
When pitched against the dollar, the Pound was 0.81% higher at 1.3139 and is up 3.5% this year. The exchange rate has consistently ranging within a 1.30 – 1.33 range for most of March.
“Cable to continue trading a 1.30-33 range near term, trapped by the positive of the indicative votes versus the negative of the Tory party tearing itself apart and dangerously threatening a general election,” says Chris Turner, Head of FX strategy at ING Group.
Manufacturing PMI was strong, certainly better than expected and sets a good platform for first-quarter GDP numbers.
“Stockbuilding ahead of Brexit undoubtedly flattered the manufacturing PMI in March. Nonetheless, the manufacturing sector should support GDP growth in Q1. And the increase in the employment and new orders balances provide a reason to think that some of the strength of the survey could be sustained beyond the 12th April, unless there is a no deal Brexit at that point,” says Andrew Wishart, an economist at Capital Economics.
Last week showed some of the strongest employment figures we’ve seen for decades although the statistics can be explained and challenged accordingly to how you view it. 0-hour contracts and lagging economic data does make employment look stronger and more buoyant than it may do in 12 months’ time post Brexit confirmations.
Following last week’s series of votes, the two proposals which received the greatest backing (yet still failed) could be re-tabled with these being a second ‘confirmatory’ EU referendum and a proposal calling for a permanent post-Brexit customs union between the UK and EU, removing the need for the controversial Irish backstop altogether.
“The focus now shifts to the alternatives that parliament will decide on next week and everything from revoking Article 50 to having a second referendum vote is on the table which will weigh on the pound,” said senior economist Nikolay Markov of Pictet Asset Management.
While some institutions have upped their probability forecasts for no-deal Brexit, it remains a generally low-probability outcome in the eyes of most analysts. If the deadline is extended longer it’s likely bulls will return to sterling because that will be the start of the slow death of Brexit as public sentiment becomes exhausted and politician’s incompetence increasingly not tolerated.
The latest near-term forecasts for the Pound from ING Bank are all subject to what happens in the coming weeks with regards to Brexit with chief EMEA FX and IR strategist, Petr Krpata stated the obvious that there’s “a lot of uncertainty” around the Pound. He continued “Cable to continue trading a 1.30-33 range near term, trapped by the positive of the indicative votes versus the negative of the governing Conservative party tearing itself apart and dangerously threatening a general election.”
Business and commercial consequences
All this is starting to take real, on the ground effects on to both British and global businesses. Even today, the drag of Brexit uncertainty has impacted Siemens and EasyJet as both firms operating in the UK had to issue outlook warnings about the negative impact of Brexit on operating conditions. Both companies sure their share price drop today after the announcements.
EasyJet CEO, Johan Lundgren, wrote “For the second half we are seeing softness in both the UK and Europe, which we believe comes from macroeconomic uncertainty and many unanswered questions surrounding Brexit which are together driving weaker customer demand.” In an open letter published in Politico, Juergen Maier of Siemens wrote “Enough is enough. We are all running out of patience. Make a decision and unite around a customs union compromise that delivers economic security and stability.”