Sterling Starts To Show Cracks
Parliament has not endorsed the EU withdrawal bill, but has voted not to leave the EU without a deal in place, however, as the vote was not binding on the government, exit without a deal in just eight days remains the legal fact.
The Prime Minister sent a letter to the European Council requesting an extension of the A50 notice period until the end of June. It seems likely that the EU would be willing to grant a shorter extension (23/5/19), but on the proviso that the deal passes through parliament. It remains unclear (but likely) that the EU would grant a longer extension in the event of a substantive development, but May reversed what she told parliament last week and only asked for a short extension. Currently, it seems highly unlikely that parliament will endorse her deal, particularly after she went on national television last night and placed the blame for the impasse on parliament, trying to claim that she was on the side of the British people, and by inference, parliament was not.
On the currency markets, the only way to explain the strong position of Sterling against other majors is that it means investors don’t think Brexit will happen. The UK has the power to revoke its notice under Article 50 (A50) of the Treaty of Lisbon until its EU membership lapses. If this happens, many will breathe a huge sigh of relief and it will be back to business as usual (well…). This would see Sterling appreciate against other majors. On the night before the referendum, the Pound was at $1.47 and €1.30: currently those currencies are $1.31 and €1.15, so there is plenty of upside gain. However, politicians are renowned for failing to do the sensible thing! The current levels come of the backs of highs this week of €1.174 and $1.33, so there is evidence of some investors getting cold feet over Sterling’s prospects.
The Forex value of Sterling will be incredibly sensitive to political developments as the abyss approaches. Anything that makes revocation of A50 or a further referendum more likely is going to push its value up. On the other hand, developments in the UK or within the EU that auger for a no deal exit will cause it to drop. My guess is that the downside risk is very much stronger than gain; in other words, any significant negative news is going to cause the value of Sterling to tank as investors seek to cut long positions on the currency and avoid getting their fingers burned. Common sense suggests that the government will revoke A50 rather than risk a chaotic exit, but common sense and politics are strange bedfellows.
- Currency Pairs